Multilayer financial networks and systemic importance: Evidence from China

Jie Cao, Fenghua Wen, H. Eugene Stanley and Xiong Wang

International Review of Financial Analysis, 2021, vol. 78, issue C

Abstract: In this paper, we develop a multilayer network structure and reveal the relationship between network structure and systemic risk. Unlike many previous studies, our model considers both liability and cross-holding of shares between financial institutions simultaneously. We propose a new systemic risk measurement by exploring the dynamic mechanism of financial contagion in the multilayer network. We display the network structure of Chinese financial institutions, including connectivity and diversity, and identify the systemic importance of them. We demonstrate that the multilayer network plays a non-linear role in financial risk spreading. Using the panel regression model and several experiment evidences, we show that the systemic risk can be explained more effectively by the linkage diversity more than the connectivity at both the institutional level and the system level. Our results highlight the importance of considering contagion mechanisms that go beyond a simple single-layer network structure.

Keywords: Multilayer financial networks; Systemic risk; Systemically important financial institutions; Connectivity; Diversity (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (25)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:78:y:2021:i:c:s1057521921002106

DOI: 10.1016/j.irfa.2021.101882

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