Modelling shadow banking system and housing market in China

Abstract

Given the lessons learned from the financial crisis and housing crash in Japan and the US, as well as the strong connection between the shadow banking sector and property market in the second-largest economy, China, it is essential to understand the mechanism of a model that contains both shadow banking activities and the housing market. Therefore, the first objective of this thesis is to model the Chinese banking and housing sector and understand the underlying mechanism. The second objective is related to a methodological issue. In recent years, many researchers, especially in mainland China, have been exploring the Chinese shadow banking system. Most researchers either only calibrate or use Bayesian estimation to estimate their model. However, none of the approaches test the model against real data. Different models can tell different stories and potentially provide different policy implications. However, if the model is rejected by the actual data, all the results and policy suggestions might become insignificant. Therefore, in my research, I adopt two different estimation approaches, Bayesian estimation and Indirect Inference approach, to first provide some understanding about Chinese shadow banking system, and second, to discover whether my model can or cannot be rejected by the actual data