Where does the risk lie? Systemic risk and tail risk networks in the Chinese financial market

Yang Deng and Chenyin Gao

Pacific Economic Review, 2023, vol. 28, issue 2, 167-190

Abstract: This paper studies tail risk connectedness and systemic risk in the Chinese financial market in the post‐crisis period of 2009–2017. We adopt the conditional value at risk (CoVaR) and complex theory to construct the tail risk connectedness network and identify the systemically important financial institutions during the Chinese financial turbulence. We precisely characterize the dynamic evolution of the tail risk connectedness at the institutional, sector and market levels. We find that, during normal times, the banking sector contributes the most tail risk to the market and that the real estate sector contributes the least. However, during the crisis period, the real estate sector played its role and became the most significant tail risk emitter. In addition, we identify the significant important financial institutions in the Chinese financial market, highlighting the fact that the four state‐owned commercial banks and two largest insurance companies dominate. Our results are helpful to both regulators for developing macroprudential supervision policies and investors interested in the Chinese financial market for making risk management strategies.

Date: 2023
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