Research on prediction of China’s financial systematic risk based on the hybrid model

An important feature of the outbreak of systemic financial risk is that the linkage and contagion of risk amongst the various sub-markets of the financial system have increased significantly. In addition, research on the prediction of systemic financial risk plays a significant role in the sustainable development of the financial market. Therefore, this paper takes China’s financial market as its research object, considers the risks co-activity among major financial sub-markets, and constructs a financial composite indicator of systemic stress (CISS) for China, describing its financial systemic stress based on 12 basic indicators selected from the money market, bond market, stock market, and foreign exchange market. Furthermore, drawing on the decomposition and integration technology in the TEI@I complex system research methodology, this paper introduces advanced variational mode decomposition (VMD) technology and extreme learning machine (ELM) algorithms, constructing the VMD-DE-ELM hybrid model to predict the systemic risk of China’s financial market. According to e RMSE , e MAE , and e MAPE , the prediction model’s multistep-ahead forecasting effect is evaluated. The empirical results show that the China’s financial CISS constructed in this paper can effectively identify all kinds of risk events in the sample range. The results of a robustness test show that the overall trend of China’s financial CISS and its ability to identify risk events are not affected by parameter selection and have good robustness. In addition, compared with the benchmark model, the VMD-DE-ELM hybrid model constructed in this paper shows superior predictive ability for systemic financial risk.

Analysis of the development of the foreign exchange market in the Russian Federation

The article focuses on the financial foreign exchange market, the development and condition of which determines the financial well-being of most commercial enterprises of the Russian Federation. The purpose of the research is to give review of the Russian foreign exchange market’ development and situation. The main factors influencing the level of the exchange rate of foreign currencies expressed in national currency are considered. The domestic and international foreign exchange market of Russia for the period 2016-2020 is analyzed. The dynamics of conversion operations, the structure of participants in the domestic foreign exchange market by type of currency. The results of trading on the foreign exchange market, futures and options as a currency instrument, the share of options and futures on the futures market of the Russian Federation, as well as the dynamics of the US dollar against the ruble and exchange trading indicators for the period from 2016 to 2020. The conditions, results and prospects of the development of the financial foreign exchange market of the Russian Federation are discussed in this article

Mathematical modelling of enterprise financial risk assessment based on risk conduction model

Risk transmission has three elements: risk source, risk flow and risk carrier. The paper quotes the asymmetric model and the joint asymmetric model to analyse the conduction effects of financial risks. At the same time, the article uses the elasticity coefficient to quantitatively calculate the risk transmission effect of the two supply chain financial financing modes. The research results prove that the risk transmission ability of each financial market has individual differences, and the foreign exchange market does not have significant risk transmission ability to other markets during the rising stage. The joint asymmetric model is more effective in predicting corporate financial risks.

Essays in Risk Management

<p>This thesis consists of five chapters that examines risk and uncertainty within two frameworks: foreign exchange market and real options. The first chapter is a preliminary part that overviews the structure of thesis. In the second chapter, I examine the impact of scheduled macroeconomic announcements on realised variance in the Canadian dollar/US dollar foreign exchange market. Information shocks as a whole are made up of public information shocks and private information shocks. I measure the public information shocks from the analyst forecast surprise and the private information shocks from volatility sensitivity to liquidity variables. I find that the realized variance is driven mainly by the latter rather than the former. However, my results for the most important announcements are not significant, which might be due to these being well-analysed publicly. Spread, as a proxy of private information shocks, is the most important liquidity measure, showing a significant increase around the arrival of announcements. My results are robust to joint effects of liquidity variables, considering announcements throughout the day (times other than 8:30 announcement), alternative measures of volatility (absolute return and modified absolute return), evaluation of announcements for US and Canada separately, examine the impact of surprise in model, and the economic classification of announcements. In the third chapter, I aim to evaluate risk and uncertainty using real options technique. I develop a framework to evaluate representative agents’ behaviour in a real options switching framework. I set up three models with revertible switching process under uncertainty and solve these using the alternating direction implicit algorithm. The models break down into: cash-cost model, cash-time model, and projection model. The cash-cost model captures the cash expenses of switching whereas the cash-time model not only captures the cash cost but also the exact time cost, which is critical in horticulture. The projection model presents an approximation of cash-time model that has less computational complexity. The results of my sensitivity analyses indicate that increases in cost, time, volatility, drift, and discount rate have negative impacts on the switch frequency. If the correlation between two crops is positive, it has negative impacts on switch frequency, otherwise it has positive impacts. Differences between the models are more pronounced over longer periods. In the fourth and fifth chapters, I extend the cash-time model from chapter three to evaluate orchardists’ behaviour in the Hawke’s Bay region. Chapter four examines the dataset thoroughly and provide a statistical review of orchards that will be modeled in chapter five. Orchardists have the incentive to switch from one type of apple to another as the apple profits change. In my model, orchardists have the option to carry on with the existing apple trees or to switch to competing apple types by uprooting the existing apple trees and planting new ones or grafting on the existing rootstock. The uprooting strategy is relatively expensive but is instantaneous, and results in young (unproductive) apple trees with a long life ahead of them. In contrast, the grafting strategy is less expensive and faster but continues with old trees. I compute the optimal land value at each age of apple trees from one-year to 33-years old. My results show that grafting is the optimal strategy when trees are young, whereas planting becomes optimal when they are old. Examining the apple dataset, I find that orchardists are biased against uprooting and grafting relative to my predictions. The deviation from what my model proposes and what orchardists follow in reality might be due to the assumption of my model and possible factors in the orchards that my model does not capture. My results show that the deviation from optimal policy for small orchardists is not significantly different from large orchardists.</p>

Essays in Risk Management

<p>This thesis consists of five chapters that examines risk and uncertainty within two frameworks: foreign exchange market and real options. The first chapter is a preliminary part that overviews the structure of thesis. In the second chapter, I examine the impact of scheduled macroeconomic announcements on realised variance in the Canadian dollar/US dollar foreign exchange market. Information shocks as a whole are made up of public information shocks and private information shocks. I measure the public information shocks from the analyst forecast surprise and the private information shocks from volatility sensitivity to liquidity variables. I find that the realized variance is driven mainly by the latter rather than the former. However, my results for the most important announcements are not significant, which might be due to these being well-analysed publicly. Spread, as a proxy of private information shocks, is the most important liquidity measure, showing a significant increase around the arrival of announcements. My results are robust to joint effects of liquidity variables, considering announcements throughout the day (times other than 8:30 announcement), alternative measures of volatility (absolute return and modified absolute return), evaluation of announcements for US and Canada separately, examine the impact of surprise in model, and the economic classification of announcements. In the third chapter, I aim to evaluate risk and uncertainty using real options technique. I develop a framework to evaluate representative agents’ behaviour in a real options switching framework. I set up three models with revertible switching process under uncertainty and solve these using the alternating direction implicit algorithm. The models break down into: cash-cost model, cash-time model, and projection model. The cash-cost model captures the cash expenses of switching whereas the cash-time model not only captures the cash cost but also the exact time cost, which is critical in horticulture. The projection model presents an approximation of cash-time model that has less computational complexity. The results of my sensitivity analyses indicate that increases in cost, time, volatility, drift, and discount rate have negative impacts on the switch frequency. If the correlation between two crops is positive, it has negative impacts on switch frequency, otherwise it has positive impacts. Differences between the models are more pronounced over longer periods. In the fourth and fifth chapters, I extend the cash-time model from chapter three to evaluate orchardists’ behaviour in the Hawke’s Bay region. Chapter four examines the dataset thoroughly and provide a statistical review of orchards that will be modeled in chapter five. Orchardists have the incentive to switch from one type of apple to another as the apple profits change. In my model, orchardists have the option to carry on with the existing apple trees or to switch to competing apple types by uprooting the existing apple trees and planting new ones or grafting on the existing rootstock. The uprooting strategy is relatively expensive but is instantaneous, and results in young (unproductive) apple trees with a long life ahead of them. In contrast, the grafting strategy is less expensive and faster but continues with old trees. I compute the optimal land value at each age of apple trees from one-year to 33-years old. My results show that grafting is the optimal strategy when trees are young, whereas planting becomes optimal when they are old. Examining the apple dataset, I find that orchardists are biased against uprooting and grafting relative to my predictions. The deviation from what my model proposes and what orchardists follow in reality might be due to the assumption of my model and possible factors in the orchards that my model does not capture. My results show that the deviation from optimal policy for small orchardists is not significantly different from large orchardists.</p>

The influence of factors on the security management of the foreign exchange market in Ukraine

The article analyzes the principles of development and security management of the foreign exchange market of Ukraine. Substantiates the influence of factors on the functioning of the foreign exchange market such as: improvement of the regulatory framework; monetary policy on the stabilization of the floating exchange rate regime; lending to the National Bank of Ukraine within the current 18-month stand-by program from the International Monetary Fund; replenishment of the market currency through the purchase and sale of government bonds; the influence of international and domestic factors on the liberalization of the foreign exchange market in Ukraine; receipt of a share of currency more than 10% of the population working abroad; restoring the confidence of individuals and entrepreneurs in the national currency. The structure and analysis of the process and dynamics of the foreign exchange market of Ukraine are characterized. The author evaluates the security management of currency regulation of the floating exchange rate regime, which directly affects the state of the foreign exchange market (Fig. 1). The state of exchange rate regulation and its impact on the foreign exchange market on the basis of personal observation during 2015-2021 are studied. The main advantage of this article is the clarification of the elements of the mechanism of currency regulation, which is due to the negative impact of a wide range of external and internal factors on the tools (Fig. 2). This mechanism is a powerful lever of state management of economic security and regulation of foreign exchange market liberalization in the context of a significant deterioration of the crisis situation in Ukraine in recent years. The main areas of security management of the mechanism of functioning of the foreign exchange market of Ukraine are the following. The first is optimization of the procedure of foreign exchange interventions of the NBU – schedule, parameters of interventions. This will increase the transparency and predictability of NBU operations in the foreign exchange market. NBU managers should abandon discriminatory approach to ensure all banks have equal access to interventions. The second is increasing of the digitization and disclosure of communication policies with actors. Its deterioration is due to negative comments addressed to banks regarding speculative actions on exchange rate formation, non-compliance with the requirements of the NBU in lending, security management and customer distrust. The third is strengthening of the reserve requirements for bank security management in order to reduce the excessive liquidity of the banking system.

Competition of the world leading currencies: Features of the current stage

Subject. The article analyzes the competition of the world leading currencies in the global economy, specifics of the current stage, trends in the role of particular currencies in the global market. Objectives. The purpose is to review the current positions of the U.S. Dollar, Euro and Yuan in the global financial markets, assess prospects for maintaining the leading role of the U.S. Dollar, development trends in the position of Euro and Yuan. Methods. I applied the content analysis of available sources, provide a historical overview of issues under consideration, scrutinized the estimates of financial analysts. Results. The paper unveils reasons for increased competition of the leading currencies (U.S. Dollar, Euro, Yuan) in the global foreign exchange market, which include an increase in the scale of payment transactions in the global financial and commodity markets. It also reveals trends in the use of particular currencies in foreign trade and financial transactions, evaluates prospects for the use of specific world currencies in the global economy. Conclusions. At present, U.S. Dollar maintains its leading positions. However, in the future, an increase in the use of Euro- and Yuan-denominated transactions should be expected in the commodity and financial markets due to enlarged presence of Chinese companies in the global economy. Further development of European integration can ensure the expansion of the single European currency in the global financial market. The share of Yuan in foreign exchange reserves of central banks tends to increase. Private investors' demand for Yuan is also expected to grow.

Financial market development strategy in crisis: Analysis and recommendations

Subject. The article considers the development strategy of the Russian financial market under new economic conditions. Objectives. The purpose is to elaborate theoretical and practical proposals to improve the financial market strategy for boosting investment and economic growth in crisis. Methods. The study rests on strategizing, which allows to propose a number of initiatives to enhance the strategy of the financial market during the crisis period, based on trends, existing competitive advantages and opportunities of the Russian economy. Results. The paper shows the need to continue the transformation of the financial system, based not only on the liberal economic paradigm and recommendations of international institutions on the free movement of capital, but also on the use of its own strategy, aimed at economic development (including in industrial regions), enabling to address environmental factors. Conclusions. In times of crisis, it is necessary to stir up State institutions for development in financial markets, synchronize monetary and fiscal policies, strengthen the regulation of cross-border capital flows, and use the ESG strategies by public companies in Russia. The establishment of some additional restrictions on capital markets and the foreign exchange market by the financial regulator, the support for the ESG approach by State institutions for development and banks will mitigate systemic risks during crisis periods and attract financial resources to long-term investment projects of the real economy, encourage the growth of capitalization of companies, including in regions.

Currency Hedging Strategies Using Histogram-Valued Data: Bivariate Markov Switching GARCH Models

Previous studies aimed at determining hedging strategies commonly used daily closing spot and futures prices for the analysis and strategy building. However, the daily closing price might not be the appropriate for price in some or all trading days. This is because the intraday data at various minute intervals, in our view, are likely to better reflect the information about the concrete behavior of the market returns and reactions of the market participants. Therefore, in this study, we propose using high-frequency data along with daily data in an attempt to determine hedging strategies, using five major international currencies against the American dollar. Specifically, in our study we used the 5-min, 30-min, 60-min, and daily closing prices of the USD/CAD (Canadian Dollar), USD/CNY (Chinese Yuan), USD/EUR (Euro), USD/GBP (British Pound), and USD/JPY (Japanese Yen) pairs over the 2018–2019 period. Using data at 5-min, 30-min, and 60-min intervals or high-frequency data, however, means the use of a relatively large number of observations for information extractions in general and econometric model estimations, making data processing and analysis a rather time-consuming and complicated task. To deal with such drawbacks, this study collected the high-frequency data in the form of a histogram and selected the representative daily price, which does not have to be the daily closing value. Then, these histogram-valued data are used for investigating the linear and nonlinear relationships and the volatility of the interested variables by various single- and two-regime bivariate GARCH models. Our results indicate that the Markov Switching Dynamic Copula-Generalized autoregressive conditional heteroskedasticity (GARCH) model performs the best with the lowest BIC and gives the highest overall value of hedging effectiveness (HE) compared with the other models considered in the present endeavor. Consequently, we can conclude that the foreign exchange market for both spot and futures trading has a nonlinear structure. Furthermore, based on the HE results, the best derivatives instrument is CAD using one-day frequency data, while GBP using 30-min frequency data is the best considering the highest hedge ratio. We note that the derivative with the highest hedging effectiveness might not be the one with the highest hedge ratio.