Quantifying interconnectedness and centrality ranking among financial institutions with TVP-VAR framework

Hai-Chuan Xu, Fredj Jawadi, Jie Zhou and Wei-Xing Zhou
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Hai-Chuan Xu: East China University of Science and Technology
Jie Zhou: East China University of Science and Technology

Empirical Economics, 2023, vol. 65, issue 1, No 4, 93-110

Abstract: Abstract Financial risk is spread and amplified through the interconnectedness among financial institutions. We apply a time-varying parameter vector autoregression model to analyze the dynamic spillover effects in the Chinese financial system. We find that the 2017 house price control policies have significantly increased the risk of China’s financial system. Before 2017, with the prosperity of the real estate market, the interconnectedness of the Chinese financial system continued to decline, while after 2017, with the slowdown of house price growth and the downturn of the real estate market, the interconnectedness turned to increase. For different sectors, the trends and the magnitudes of the spillover effects are diverse, and any sector can contribute to systemic risk in a dynamic way. Finally, we rank 20 systemically important financial institutions according to two centrality measures. The stable institution ranking provides less noisy information for regulators to formulate a policy and intervene in the market effectively.

Keywords: TVP-VAR; Spillover effect; Systemic risk; Systemically important financial institutions; Ranking stability (search for similar items in EconPapers)
JEL-codes: G10 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s00181-022-02338-x

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