FRM@Chinese Mainland captures the systemic tail event behavior based on 125 Financial Institutions listed in Chinese Mainland, which are traded on the stock exchanges in Shanghai and Shenzhen. The trade and financial flow between these markets has recently reached new highs, thus the risk of spillover between them has also increased.

Using the adjacency matrix we can describe the network dynamic and behavior between companies listed on the 2 stock exchanges (Shanghai and Shenzhen) as shown in the figure below:

Details:

We propose a linear lasso measure to estimate systemic interconnectedness across financial institutions based on tail-driven spill-over effects in an ultra-high dimensional framework. Methodologically, we employ a variable selection technique in a time series setting for a linear quantile regression framework with 5% quantile. We can thus include more financial institutions into the analysis, to measure their interdependencies in the distribution tails.

Then FRM is induced from this model which is the averaged tuning parameter lambda from the lasso technique.

Risk Levels Explained

Red: severe risk of a crisis in the financial market. Our risk measure suggests that a financial crisis is imminent or happening right now. This risk level is given for lambda values higher than the 80%-ratio.

Orange: high risk of crisis in the financial market. A crisis might occur very soon. This risk level is given for lambda values between the 60%-ratio and 80%-ratio.

Yellow: elevated risk of crisis in the financial market. The incidence of a crisis is somewhat higher than usual. This risk level is given for lambda values between the 40%-ratio and 60%-ratio.

Blue: general risk of crisis in the financial market. There is no specific risk of a crisis. This risk level is given for lambda values between the 20%-ratio and 40%-ratio.

Green: low risk of crisis in the financial market. The incidence of a crisis is less likely than usual. This risk level is given for lambda values lower then the 20%-ratio.

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