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Network volatility, contagion, and two-pillar policies: Insights from Chinese financial sector data

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  • Zhang, Xiaoyuan
  • You, Hang

Abstract

We employ the LASSO-ΔCoVaR model to establish multilayered risk networks encompassing China’s banking, insurance and securities industries and construct novel indicators to measure risk volatility and contagion. We then analyze the impact of two-pillar policies on mitigating financial risk through VAR models. Our findings reveal that: (1) The network volatility during stock market downturns serves as a precursor to spillover effects. (2) The implementation of stricter macroprudential policies initially elicits negative market responses, yet markets adjust and stabilize over-time. (3) Adjustments in monetary policy yield short-term reductions in financial sector risk. (4) two-pillar policies complement each other in enhancing financial stability.

Suggested Citation

  • Zhang, Xiaoyuan & You, Hang, 2025. "Network volatility, contagion, and two-pillar policies: Insights from Chinese financial sector data," The North American Journal of Economics and Finance, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:ecofin:v:79:y:2025:i:c:s1062940825000890
    DOI: 10.1016/j.najef.2025.102449
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    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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