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Systemic risk network of Chinese financial institutions

Author

Listed:
  • Fang, Libing
  • Sun, Boyang
  • Li, Huijing
  • Yu, Honghai

Abstract

The Chinese stock market crash in June 2015 has demonstrated necessary to improve understanding of systemic risk from the perspective of financial network. This study constructs a tail risk network to present overall systemic risk of Chinese financial institutions, given the macroeconomic and market externalities. Employing the Least Absolute Shrinkage and Selection Operator (LASSO) method of high-dimensional models, our results show that firm's idiosyncratic risk can be affected by its connectedness with other institutions. The risk spillover effect from other companies is the main driving factor of firm-specific risk, comparing with macroeconomic state, firm characteristics and historical price movement. The number of connections between institutions significantly increases during June 2014 to June 2016. Moreover, we utilize the Kolmogorov-Smirnov statistic to test significance of systemic risk beta based on tail risk and further rank the systemic risk contribution. Finally, we test the determinants of systemic risk contribution in a forward-looking way. Regulators could detect those firms that are most threatening to the stability of system.

Suggested Citation

  • Fang, Libing & Sun, Boyang & Li, Huijing & Yu, Honghai, 2018. "Systemic risk network of Chinese financial institutions," Emerging Markets Review, Elsevier, vol. 35(C), pages 190-206.
    • Handle: RePEc:eee:ememar:v:35:y:2018:i:c:p:190-206
    DOI: 10.1016/j.ememar.2018.02.003
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    More about this item

    Keywords

    Systemic risk contribution; Tail risk network; Firm-specific risk; VaR;
    All these keywords.

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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