Measurement of Systemic Risk in Global Financial Markets and Its Application in Forecasting Trading Decisions

Jianxu Liu, Quanrui Song, Yang Qi, Sanzidur Rahman () and Songsak Sriboonchitta
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Jianxu Liu: Faculty of Economics, Shandong University of Finance and Economics, Jinan 250000, China
Quanrui Song: Faculty of Economics, Chiang Mai University, Chiang Mai 50200, Thailand
Yang Qi: Faculty of Economics, Shandong University of Finance and Economics, Jinan 250000, China
Songsak Sriboonchitta: Faculty of Economics, Chiang Mai University, Chiang Mai 50200, Thailand

Sustainability, 2020, vol. 12, issue 10, 1-15

Abstract: The global financial crisis in 2008 spurred the need to study systemic risk in financial markets, which is of interest to both academics and practitioners alike. We first aimed to measure and forecast systemic risk in global financial markets and then to construct a trade decision model for investors and financial institutions to assist them in forecasting risk and potential returns based on the results of the analysis of systemic risk. The factor copula-generalized autoregressive conditional heteroskedasticity (GARCH) models and component expected shortfall (CES) were combined for the first time in this study to measure systemic risk and the contribution of individual countries to global systemic risk in global financial markets. The use of factor copula-based models enabled the estimation of joint models in stages, thereby considerably reducing computational burden. A high-dimensional dataset of daily stock market indices of 43 countries covering the period 2003 to 2019 was used to represent global financial markets. The CES portfolios developed in this study, based on the forecasting results of systemic risk, not only allow spreading of systemic risk but may also enable investors and financial institutions to make profits. The main policy implication of our study is that forecasting systemic risk of global financial markets and developing portfolios can provide valuable insights for financial institutions and policy makers to diversify portfolios and spread risk for future investments and trade.

Keywords: stock markets; factor copula; dependence; forecasting risk; financial crisis (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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