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Financialization, Leverage Ratio and Systematic Risk

【Authors】
ZHANG Chengsi, JIA Xiangfu, LIAO Wenting
【WorkUnit】
Renmin University of China, 100872.
【Abstract】

This paper measures the leverage ratio in China from macro and micro aspects. Based on quarterly data from Q1 2004 to Q4 2019, we used the factor augmented vector autoregression with time-varying parameter (TVP-FAVAR) model to construct the relationship between leverage ratio, financialization level, and systematic risk in China. We then studied the spillover effect between different levels of leverage ratio and its impact on systematic risk. The results are as below. The degree of financialization had a positive impact on the macro leverage ratio but a negative impact on the micro leverage ratio, and the impact decreased rapidly after 2008; the macro leverage ratio negatively impacted the systematic risk before the 2008 financial crisis, and then the impact became positive after 2008 and the impact gradually increased, while the impact of the micro leverage ratio on the systematic risk was in the opposite direction. Against the background of economic financialization, this paper suggests that China should pay more attention to the correlation between the leverage ratio of various sectors and the role of financialization factors, so as to better guard against and dissolve systematic financial risks.


JEL:E44

【KeyWords】
Financialization, Leverage Ratio, Systematic Financial Risk, TVP-FAVAR