This article was originally published in the Forty-something China Finance Author: Gao Shanwen As a market participant, I would like to talk about the early warning, transmission and policy intervention of financial crisis: Based on the analytical ideas of the effective market hy

This article was originally published in the Fortune of China Finance Author: Gao Shanwen

As a market participant, I would like to talk about the early warning, transmission and policy intervention issues of financial crisis:

　　Based on the analysis of effective market hypothesis , financial crisis is not early warning. Instead of warning of the financial crisis, it is better to allow the short selling mechanism to play a better role, so that the market can achieve more effective price discovery and price correction functions.

　　The spread and intensification of the financial crisis is mainly in the debt market spreading along three chains, namely the liquidity crisis, the solvency crisis and the stalling of the real economy. Relevant policy interventions should also be carried out along the above three chains.

　　As for the current situation in China, the best policy intervention to deal with potential financial risks is to choose not to intervene. Let the bullet fly for a while, and there is no need to rush to rescue. Excessive prevention will lead to the inability to develop many risk pricing tools and market self-discipline mechanisms.

　—— Academic Committee of the China Financial Fortune (CF40) and Chief Economist of Anxin Securities Gao Shanwen

　　Three important issues in preventing financial crises—feasibility of early warning, transmission mechanism and policy intervention

　　Text Gao Shanwen

　　Preventing systemic financial crises has great theoretical, practical and policy significance. Many academic research has conducted a relatively systematic study on the above issues through a large number of theoretical deductions, empirical analysis and numerical simulations, and put forward many inspiring views. The policy suggestions that are based on China are also worth pondering. As a market participant, I would like to talk about several important issues in crisis prevention and intervention.

　　01

　　Can the financial crisis be early warning

　　The first question involves early warning of financial crisis. As we all know, there is a particularly influential hypothesis in financial market theory, called the efficient market hypothesis. Based on the analytical idea of ​​the effective market hypothesis, it will be found that early warning is a false proposition: if a financial crisis can be early warning, then through transactions based on the early warning indicator system, huge profits can be obtained. This makes it impossible for all early warnings that can be repeatedly and successfully achieved based on public information and theoretical models ultimately.

　　After the 2008 financial crisis, people have criticized economic theory a lot. People have questioned why so many economists and famous scholars have not expected such a huge crisis. Some defenders of effective market hypothesis and rational expectations theory have made a very important rebuttal that if the crisis is expected, the market would have expected it long ago and could make profits based on this expectation, but this in turn would ineffective the crisis warning.

　　Looking back on the history of financial crisis since the 20th century, after each crisis, many people say that they should warn of the crisis. But in more than 100 years of history, no one has been able to continue to warn of the financial crisis.

　In the 1930s, Wall Street stocks fell sharply, and some people came forward and said that they had long expected the stock market to collapse. Later, the fun-lovers carefully checked his prediction records and found that in the first ten years, he had been "predicting" every year that the stock market would collapse next year, and finally got it right. However, this prediction is meaningless in both operational and policy intervention.

After the Southeast Asian financial crisis in 1997, many people proposed to warn of the crisis. But even the Federal Reserve, which has strong economic research capabilities and rich experience in policy implementation, has not predicted the financial tsunami in 2008. Before European and American scholars could understand the lessons of 2008, the European debt crisis in 2012 broke out again, and no one warned it.

　　I think early warning itself is a false proposition, and fundamentally speaking, financial crisis is unwarranted. No matter how much effort is made, "warning for the financial crisis" is a waste of time.

From a policy perspective, a more valuable question is why the market itself is not alert to the crisis in advance.If the market can be a little alert to the crisis, it will take many corrections on its own, which in turn will prevent the crisis from happening, or significantly reduce its destructive power. As mentioned above, pre-crisis warning has commercial profit margins and can make money by short selling. This incentive itself has a strong force to prevent the market from going to crisis.

　　Why does the market not fully exert this kind of preventive power, partly related to the many frictions in reality. An important reason is that many markets in reality cannot short, such as the real estate market.