Research on Financial Systemic Risk Early Warning Based on Markov Regime Switching Model

Jiaer Yang

doi:10.54097/mwq51050

Authors

Jiaer Yang

DOI:

https://doi.org/10.54097/mwq51050

Keywords:

Markov Regime Switching Model, Financial Systemic Risk, Early Warning

Abstract

This paper discusses the early warning mechanism of financial systemic risk based on Markov regime switching model (MRSM). In view of the infectivity, widespread influence and serious consequences of systemic risk, traditional methods are often insufficient. In this paper, MRSM is used to improve the accuracy and timeliness of early warning, and an index system including macro-economy, policy changes, financial fragility and infectious risks is constructed. Principal component analysis (PCA) is used to integrate risk indexes of all dimensions to form financial stress index (FSI). Using a variety of economic and financial data, identify and predict the systemic risk state through MRSM. The results show that the model can effectively warn the high-risk period in advance, and its accuracy and timeliness are verified in practice, which provides an effective risk management tool for regulators.

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