Social Sciences in China (Chinese Edition)

No.12, 2020

The Risk Contagion Relationship Between the Financial Market and the Macro Economy： A Mixed-Frequency Based Empirical Research

(Abstract)

Yang Zihui

Serving the real economy is an important aim of finance and a fundamental measure for preventing and defusing financial risks. The failure of traditional studies using the co-frequency method to deal with the frequency mismatch between financial market and macroeconomic data can lead to the major mistakes of ignoring important risk contagion pathways, severely underestimating financial risk spillovers, and misjudging the role of risk contagion. The mixed-frequency causality test and mixed-frequency spillover method can effectively overcome this shortcoming. On this basis, we carried out research on the risk contagion relationship between China’s financial market and macro economy. We further overcame the “curse of dimensionality” by using the Factor-augmented VAR model to empirically test the specific impact of financial risk on the macro-sector information set so as to identify the impact of risk on different economic sectors and the risk transmission mechanism. Our findings show that China’s financial market is a net exporter of risk shocks and all of its macroeconomic sectors are net importers of risk shocks. Financial risks cause marked changes in consumption, interest rates, currency, consumer confidence, etc., which in turn have a significant impact on macroeconomic sectors. Changes in such macroeconomic sectors as interest rates and currencies will have a noteworthy effect on the financial market through credit channels and the transmission paths explained by the “wait and see” theory. This will help bring the macro-control system in line with the requirements of high-quality development.