The Formation Mechanism of Systemic Financial Risk under External Shocks

Yi Fang and Zhongbo Jing
Additional contact information
Yi Fang: School of Finance, Central University of Finance and Economics, Beijing 100083, China
Zhongbo Jing: School of Management Science and Engineering, Central University of Finance and Economics, Beijing 100083, China

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2023, vol. 18, issue 2, 198-243

Abstract: By incorporating both the fire sales contagion mechanism and the bankruptcy contagion mechanism into a bank network model, this paper examines how risks are generated under dynamic shocks. In particular, this paper constructs systemic risk indicators suitable for analyzing multiple rounds of contagion under different shocks (time dimension) and from institutions and assets (spatial dimension). Indicators that measure the indirect relevance between institutions and between assets are also innovatively built. It is found that due to deleveraging or bankruptcy among a large number of banks, the systemic risk exhibits an upward trend marked by intermittent jumps under varying intensities of shocks. Risks are generated mainly through the fire sales contagion mechanism of deleveraging under small shocks, and through the bankruptcy contagion mechanism under large shocks. In terms of influencing factors, a stronger indirect relevance, a lower leverage skewness and a higher leverage level in the banking system lead to higher risks. In particular, the influence of leverage skewness on systemic risk is stronger than that of leverage level.

Keywords: systemic financial risk; external shock; banking supervision; direct contagion; indirect contagion (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
https://journal.hep.com.cn/fec/EN/10.3868/s060-017-023-0010-2 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fec:journl:v:18:y:2023:i:2:p:198-243

Access Statistics for this article

Frontiers of Economics in China-Selected Publications from Chinese Universities is currently edited by LONG Jie

More articles in Frontiers of Economics in China-Selected Publications from Chinese Universities from Higher Education Press
Bibliographic data for series maintained by Frank H. Liu ().