Salience theory value spillovers between China’s systemically important banks: evidence from quantile connectedness

Xiaoye Jin ()
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Xiaoye Jin: East China University of Political Science and Law

Financial Innovation, 2024, vol. 10, issue 1, 1-39

Abstract: Abstract Analyzing the interdependencies among financial institutions is critical for designing systemic risk monitoring mechanisms; however, most existing research focuses on the first moment of the return distribution, which falls into the conventional models of choice under risk. Previous literature has observed the scarcity of investors’ attention and processing power, which makes the traditional theory of choice under risk more vulnerable and brings the salience theory that accommodates investors’ cognitive limitations to our attention. Motivated by evidence of salience theory value (STV) containing unique information not captured by traditional higher-order moments, we employ a quantile connectedness approach to examine the STV interconnectedness of China’s systemically important banks (C-SIBs). The quantile approach allows us to uncover the dynamic STV interconnectedness of C-SIBs under normal, bearish, and bullish market conditions and is well-suited to extreme risk problems. Our results show that the C-SIBs system is asymmetrically interconnected across quantiles and at higher levels under bullish than bearish market conditions. Principally, a bank’s performance in the C-SIBs system depends on its systemic importance and market conditions. Furthermore, the comparative analysis indicates that STV could provide more information than higher-order moments in capturing the dynamic change in the C-SIBs system and detecting some market events more precisely. These results have important implications for policymakers and market participants to formulate regulatory policy and design risk management strategies.

Keywords: Salience theory value; Extreme spillovers; Quantile connectedness; China’s systemically important banks (search for similar items in EconPapers)
JEL-codes: C32 G11 G21 G41 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1186/s40854-023-00582-3

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