Do China’s Non-Financial Firms Affect Systemic Risk?

Bo Zhu, Huafu Mao, Yuan Huang, Renda Lin and Feng Niu

Emerging Markets Finance and Trade, 2020, vol. 56, issue 12, 2711-2731

Abstract: This article investigates the contribution of non-financial firms to systemic risk in the entire financial system and the corresponding firm-specific determinants. Thus, we develop a new measure of systemic risk with a test of our hypothesis that separates systemic risk from systematic risk. We also consider the firm-level determinants of contributions to systemic risk using a fixed-effects model and a logit model. Using data on companies in the CSI 300 index from 2008 to 2016, we find that our extreme value theory (EVT)-copula method is a good fit for testing the joint probability distribution of extreme returns as well as diverse dependence patterns with asymmetry and non-linearity characteristics. The empirical results provide evidence against the marginal expected shortfall (MES) method without a mechanism to test the statistical significance of determination. Several non-financial firms, though not all financial institutions, can generate significant spillover effects on the financial system. Our regression results suggest that, among firms with a significantly positive contribution to systemic risk, smaller firms have greater spillover effects on the financial system in China. Moreover, economy-wide systemic risk information and dynamic identification on systemically important firms deserve more attention in terms of macro-prudential regulation.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:mes:emfitr:v:56:y:2020:i:12:p:2711-2731

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DOI: 10.1080/1540496X.2018.1562893

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