Measuring Systemic Risk Contagion Effect of the Banking Industry in China: A Directed Network Approach

Zi-Sheng Ouyang, Ying Huang, Yun Jia and Chang-Qing Luo

Emerging Markets Finance and Trade, 2020, vol. 56, issue 6, 1312-1335

Abstract: To capture the impact of investor sentiment on risk contagion of financial institutions and potential tail risks caused by financial network structure, this paper uses a directed network approach to measure systemic risk contagion effect of Chinese banking industry. We use linear quantile lasso regression and local polynomial method to estimate TENET model, and construct a weighted directed network. Moreover, we study directed network from different perspectives, analyze financial risk contagion effect and the influence of investor sentiment on financial risk contagion, and identify systemically important financial institutions. We find that: (1) As crisis spreads, financial system becomes more closely related, and total network connectivity continues to rise until it reaches a maximum value. (2) Total network connectivity and systemic risk have the same upward or downward trend, but systemic risk lags behind total network connectivity. (3) Current bank has characteristics of “too big to fail” and “too contact to fail”.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:mes:emfitr:v:56:y:2020:i:6:p:1312-1335

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DOI: 10.1080/1540496X.2019.1711368

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