An Adaptive Lagrangian Algorithm for Optimal Portfolio Deleveraging with Cross-Impact

This paper considers the problem of optimal portfolio deleveraging, which is a crucial problem in finance. Taking the permanent and temporary price cross-impact into account, the authors establish a quadratic program with box constraints and a singly quadratic constraint. Under some assumptions, the authors give an optimal trading priority and show that the optimal solution must be achieved when the quadratic constraint is active. Further, the authors propose an adaptive Lagrangian algorithm for the model, where a piecewise quadratic root-finding method is used to find the Lagrangian multiplier. The convergence of the algorithm is established. The authors also present some numerical results, which show the usefulness of the algorithm and validate the optimal trading priority.

Structural Deleveraging: Evidence from China

Using province-level data in China for the period of 1999-2015,we examine the mechanisms through which sectoral differences in leverage ratio and productivity affect macro leverage ratios.The state-owned sector undertakes a large number of public services and plays an irreplaceable role in solving market failures and providing public goods.However,in the case of information asymmetry and incentive incompatibility,these policy burdens affect the leverage optimization and productivity improvement of the state-owned sector.From the perspective of sectoral differences,we therefore decompose the change in macro leverage ratio into leverage ratio structure effect and productivity structure effect,and then substantiate the impact mechanisms of these two effects on macro leverage ratios.Overall,our conclusions provide theoretical support and empirical evidence for structural deleveraging in China.

Financial Shocks,Deleveraging and Macroeconomic Fluctuations in China

To deleverage is one of the major tasks for the supply-side structural reform in China,and to steadily deleverage in order is the key to fending offand defusing financial risks.This paper uses the economic statistics of China around 2016 to depict the“expansion-contraction”fluctuations with Chinese macroeconomy during the deleveraging.In this realistic context,it constructs a financial business cycle model based on the financial accelerator theory and attempts to use default cost changes to introduce financial shocks and understand China’s macroeconomic fluctuations in the deleveraging context in the perspective of unanticipated and anticipated shocks.Results of the numerical model simulation show that before and after the deleveraging,the fluctuations of credit,leverage ratio,credit spread and other major macroeconomic variables originate not only from the changes with unanticipated default cost.Anticipated changes with default cost can similarly explain the“expansion-contraction”macroeconomic fluctuations in recent years and offer a new perspective into the fluctuations during deleveraging.Accordingly,government,when practicing deleveraging policies,is advised to take into full consideration not only the actual changes with default cost,but also anticipated factors of financial institutions.

Risk Premiums and Financial Stability

The collective revelation of credit institutions as regards the imminence of specific risks materialising, which often follows long periods of underestimating probable losses, can trigger a broad-based financial deleveraging via an overly high upsurge in banks＇ risk premiums vis-a-vis the dynamics of fundamentals underlying loan repayment capability. In this context, this paper seeks to investigate the banking sector＇s internal mechanisms that might bring about a negative spiral of credit risk by building a model for the interaction between the increase of the risk premium and that of net interest income and provisioning rate. Statistical results confirm that a higher risk premium is one of the major determinants of credit default in Romania and its excessive widening could affect financial stability in Romania.

Evaluation on the Process of Supply-Side Structural Reform:An Empirical Analysis Based on Economic Composite Index

Since 2015, the supply-side structural reform has promoted the transformation of China’s economy to high-quality development with “capacity reduction, de- stocking, deleveraging, cost reduction and improving underdeveloped areas” as the main line. This paper constructs the supply-side composite index and the supply- side reform index to track the economic supply-side status and supply-side reform process at the national level and in 31 provinces (municipalities), and analyzes the relationship between supply-side structure and economic growth by combining the SOLOW model. Based on that, this paper proposes that the reform of “optimizing stock allocation” to achieve “capacity reduction, de-stocking, deleveraging, and cost reduction” has achieved remarkable results, and follow-up focus should be put on promoting the reform of “expanding quality increment” to “improve underdeveloped areas”, so that innovation-driven high-quality development can be truly realized.

China: Unscathed through the Global Financial Tsunami

This paper investigates the reasons behind the resilience of China＇s economy to the global financial tsunami. China ＇s economy is lowly leveraged in its banking, household, public and external sectors and, therefore, is less plagued by the global deleveraging than most developed economies. Chinese domestic sectors have improved significantly over the past decade, giving them larger capacity to cope with external shocks than during the Asian financial crisis a decade ago. Contrary to the conventional wisdom that China＇s economic growth is highly dependent on exports, we find that the main growth engine for China is domestic demand. Destocking, rather than falling exports, was the main cause of the sharp economic slowdown in China in late 2008 and early 2009. Therefore, the global economic slowdown should have limited impact on China＇s economy. We forecast a sustained eeonomic recovery in China in 2009-2011, with real GDP growth exceeding 10 percent in 2010.