Tail-risk spillovers from local government bonds to financial sectors in China

This paper investigates the tail-risk contagion mechanism from local government bonds (LGBs) to the financial sector in China. Using dynamic network models, we construct three daily time-varying tail-risk contagion networks from 2017 to June 2025, including LGBs, financial sector, and the total nodes (LGBs and financial institutions). Then, we compare the patterns of tail-risk spillover networks across three significant cases, including the announcement of local government special-purpose bonds issuing, the COVID-19 pandemic, and the swapping existing hidden debts. Besides, we analyze the tail-risk spillovers from LGBs to the financial sector from the perspective of network density, risk takers, geographical location of financial institutions and macroeconomic variables. We find that the implementation of polices of LGBs is efficient for controlling tail-risk contagions. Geographical proximity is identified as a critical factor within tail-risk contagion network, wherein listed financial institutions and LGBs within the same region exhibit pronounced tail-risk spillovers. WTI and exchange rates also have important influences. Finally, our paper offers underscore the complex interdependence and highlights the importance of regional risk monitoring and macroprudential policies.