Systemic risk of Chinese financial institutions and asset price bubbles

Xiaoming Zhang, Chunyan Wei, Chien-Chiang Lee () and Yiming Tian

The North American Journal of Economics and Finance, 2023, vol. 64, issue C

Abstract: Although there has not been a large-scale systemic crisis in China, high-risk financial events have occurred continuously in recent years. This research thus creatively analyzes the determinants of systemic risk for Chinese financial institutions from the view of asset price bubbles. First, we identify bubbles in the China stock and real estate markets on the basis of the generalized sup Augmented Dickey-Fuller (GSADF) model and explain the reasons for bubble formations according to the stage of China's economic development and policies implementation. At this stage, considering the differences in economic development levels of different cities, the real estate bubbles in the first, second and third tier cities and the whole country were innovatively identified. Second, on the basis of the DCG-GARCH-CoVaR model to measure the systemic risk of listed financial institutions in China and to classify institutions, the results show that the main source of such risk is the banking sector. Furthermore, by constructing regression models, stock market bubbles and real estate bubbles both positively correlate with systemic risk throughout the sample period. Meanwhile, the impact of bubbles on the systemic risk of different types of financial institutions was taken into account so that regulators prioritized different types of institutions with different characteristics when faced with decisions. Finally, we provide macro-prudential policy advice to regulators in order to weaken the impact of bubbles on financial stability to avoid systemic crises.

Keywords: Financial institutions; Systemic risk; Asset price bubbles; Stock markets; DCC-GARCH-CoVaR model (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:64:y:2023:i:c:s1062940823000037

DOI: 10.1016/j.najef.2023.101880

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