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Business connectedness or market risk? Evidence from financial institutions in China

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  • Liang, Qi
  • Lu, Yanchen
  • Li, Zheng

Abstract

We utilize the spectral representation of generalized forecast error variance decomposition to investigate the frequency dynamics of volatility connectedness and systemic risk of financial institutions in China from 2011 to 2018. We find that, first, high-frequency components account for the largest part of volatility connectedness (48.33%), followed by low-frequency components, and finally the medium-frequency components. Second, the low-frequency components reflect the business connectedness among financial institutions, while the high-frequency components capture the market risk. Third, the business connectedness among financial institutions will lead to a rise in overall connectedness as well as the accumulation of potential risks. Further, once a crisis breaks out, the potential risks have realized and the business connectedness among institutions declines; while market risk increases rapidly, which helps systemic financial risk stay at a high level. Lastly, among the financial sectors, the banking sector possesses a relatively higher level of business connectedness which plays an important role in the accumulation of potential financial risks; the securities sector features with higher market risk; while the insurance sector has both comparatively lower business connectedness and market risk.

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  • Liang, Qi & Lu, Yanchen & Li, Zheng, 2020. "Business connectedness or market risk? Evidence from financial institutions in China," China Economic Review, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:chieco:v:62:y:2020:i:c:s1043951x20301000
    DOI: 10.1016/j.chieco.2020.101503
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    2. Wang, Ruting & Althof, Michael & Härdle, Wolfgang Karl, 2023. "A financial risk meter for China," Emerging Markets Review, Elsevier, vol. 56(C).
    3. Wang, Ze & Gao, Xiangyun & Huang, Shupei & Sun, Qingru & Chen, Zhihua & Tang, Renwu & Di, Zengru, 2022. "Measuring systemic risk contribution of global stock markets: A dynamic tail risk network approach," International Review of Financial Analysis, Elsevier, vol. 84(C).
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    9. Cheng, Minying & Jin, Ling & Li, Zhisheng & Lin, Bingxuan, 2022. "The effectiveness of government stock purchase during market crash: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).

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    More about this item

    Keywords

    Spillover network; Spectral representation; Business connectedness; Market risk;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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