Individual institutions marginal contributions to the systemic risk contain predictive power for its potential future exposure and provide early warning signals to regulators and the public. We use higher-order co-skewness and co-kurtosis to construct systemic risk contribution measures, which allow us to identify and characterize the co-movement driving the asymmetry and tail behavior of the joint distribution of asset returns. We illustrate the usefulness of higher-order moment augmented approach by using 4868 stocks living in the Chinese market from June 2002 to March 2022. The empirical results show that these higher-order moment measures convey useful information for systemic risk contribution measurement and portfolio selection, complementary to the information extracted from a standard principal components analysis.

We analyze the latent factors for the Chinese market through the recently proposed risk premium principal component analysis (RP-PCA). Our empirical research covers 95 firm characteristics. We demonstrate that the RP-PCA on the Chinese market can identify factors that capture co-movements and explain pricing. Compared to the traditional PCA approach, it explains a larger proportion of return variation in both double-sorted and single-sorted portfolios. The Sharpe ratios of the tangency portfolios are significantly higher than those of the standard PCA. Additionally, we show that the RP-PCA loadings are more closely associated with factor returns.

This paper investigates the monetary policy in China over the last decades with a typical emphasis on the post-Asian crisis period. A Factor-Augmented VAR method is used to study several important monetary policy instruments and their effects on the stabilization of the Chinese economy. We find that the 7-day repo rate and a general monetary guidance, which is represented by a factor, are effective in stimulating the economic performance by promoting industrial production. However, the effects of monetary policy on price levels are still weak. A policy instrument with explicit inflation target will be a better way for China to stabilize domestic inflation, and thereby to maintain macroeconomic and financial stability.

This paper investigates the impact of macro variables on the volatility of bond returns. Using the principal components analysis, we extract the “real” and “money” factors from the real activities and monetary variables, respectively. Following Campbell, Lettau, Malkiel, and Xu (2001), we decompose the bond volatility into market-level volatility and maturity volatility. Using the daily returns on the 1-, 5-, 10- and 30-year US treasury bonds, we find that the macro factors significantly affect the bond volatility. In particular, the “real” factor affects the bond volatility of all maturities while the monetary variables are significantly related to the volatility of short-term bonds and weakly related to the volatility of medium-term bonds.