Predictability of Financial Crises: EMBA student Sebastian Petric explains his new book

12 September 2019

Kellogg EMBA student and investment professional, Sebastian Petric’s book, Predictability of Financial Crises: The Impact of Fundamental, Policy-induced and Institutional Vulnerabilities on China Compared to Other Emerging Markets, is to be published next week (week commencing the 16 September 2019). Here he gives a brief explanation of the findings of his research.

Sebastian has a proven track record in research and asset management and a strong interest in capital markets and asset pricing, development finance, inclusive globalisation, poverty reduction and sustainable economic growth. 

The goal of my book, Predictability of Financial Crises: The Impact of Fundamental, Policy-induced and Institutional Vulnerabilities on China Compared to Other Emerging Markets, is to analyse the determinants of financial crises, in particular of currency crises, to better understand them and deduct implications for predicting and preventing these events. Empirical analysis of crises is one element of early warning systems (EWS) mainly capturing economic and financial factors. The underlying vulnerabilities of EWS are, for instance, macroeconomic variables or balance sheet mismatches. From these variables, the likelihood of a certain type of crisis is deducted. However, this significantly depends on the definition of crisis, as well as on the forecast horizon.

A pure focus on fundamentals leads to a myopic view on the topic of financial crisis. An expanded conceptualisation of vulnerability – fundamental, policy-induced, institutional – is necessary to better understand and thus, predict outcomes from an early warning perspective. By detaching the analysis from one specific dimension, I encourage market observers to acknowledge the multiple forms of vulnerability to financial crises. Hence, my book proposes a unified framework for modelling currency crises along said three analytical dimensions.

The expanded scope of the concept of vulnerability to financial crises is applied in detail to China’s state in the second half of 2015 and in 2016. Firstly, however, I analyse why China was less severely affected by historic financial crises over the past forty years relative to other emerging markets and thus, the country’s rise did not get derailed. By drawing on lessons from past financial crises, I shed light on the notion that China had advantages along the three analytical dimensions of the conceptual framework which made the country less vulnerable to financial crises, in particular to excess volatility in China’s currency.

I hypothesise, however, that certain variables of these dimensions have changed, thus leading to increased fragilities of China in the second half of 2015 and 2016. Therefore, the question I seek to answer in my book is: “Analysis of China’s rise by applying a theoretical framework of fundamental, policy-induced and institutional vulnerabilities of emerging markets. How did China manage to continue its steep rise over the last forty years while other emerging markets were derailed by financial crises and what caused the country’s struggles in the second half of 2015 and 2016?”

Sebastian’s book will be available on amazon. If you want to know more, please get in touch with him at petric.sebastian@gmail.com.

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