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

Abstract

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 eRMSE, eMAE, and eMAPE, 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.