Business connectedness or market risk? Evidence from financial institutions in China

Qi Liang, Yanchen Lu and Zheng Li

China Economic Review, 2020, vol. 62, issue C

Abstract: We utilize the spectral representation of generalized forecast error variance decomposition to investigate the frequency dynamics of volatility connectedness and systemic risk of financial institutions in China from 2011 to 2018. We find that, first, high-frequency components account for the largest part of volatility connectedness (48.33%), followed by low-frequency components, and finally the medium-frequency components. Second, the low-frequency components reflect the business connectedness among financial institutions, while the high-frequency components capture the market risk. Third, the business connectedness among financial institutions will lead to a rise in overall connectedness as well as the accumulation of potential risks. Further, once a crisis breaks out, the potential risks have realized and the business connectedness among institutions declines; while market risk increases rapidly, which helps systemic financial risk stay at a high level. Lastly, among the financial sectors, the banking sector possesses a relatively higher level of business connectedness which plays an important role in the accumulation of potential financial risks; the securities sector features with higher market risk; while the insurance sector has both comparatively lower business connectedness and market risk.

Keywords: Spillover network; Spectral representation; Business connectedness; Market risk (search for similar items in EconPapers)
JEL-codes: C58 G20 G28 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:62:y:2020:i:c:s1043951x20301000

DOI: 10.1016/j.chieco.2020.101503

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