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The Analysis of Risk Measurement and Association in China’s Financial Sector Using the Tail Risk Spillover Network

Author

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  • Can-Zhong Yao

    (School of Economics and Finance, South China University of Technology, Guangzhou 510006, China)

  • Ze-Kun Zhang

    (School of Economics and Finance, South China University of Technology, Guangzhou 510006, China)

  • Yan-Li Li

    (School of Economics and Finance, South China University of Technology, Guangzhou 510006, China)

Abstract

This study focused on analyzing the complexities and risk spillovers that arise among financial institutions due to the development of financial markets. The research employed the conditional value at risk (CoVaR) methodology to quantify the extent of tail risk spillover and constructed a risk spillover network encompassing Chinese financial institutions. The study further investigated the characteristics, transmission paths, and dynamic evolution of this network under different risk conditions. The empirical findings of this research highlighted several important insights. First, financial institutions play distinct roles in the risk spillover process, with the securities and banking sectors as risk exporters and the insurance and diversified financial sectors as risk takers. The closest risk spillover relationships were observed between banking and insurance and between securities and diversified financial sectors. Second, in high-risk scenarios, there is significant intrasectoral risk transmission between banks and the diversified financial sector, as well as dual-sectoral risk contagion between banks and securities, with the most-common transmission occurring between diversified financial and securities sectors. Finally, the securities sector acts as the pivotal node for risk spillovers, being the main transmitter of intersectoral risks. The formation and evolution of risk spillover networks are influenced by endogenous mechanisms, in particular the convergence effect.

Suggested Citation

  • Can-Zhong Yao & Ze-Kun Zhang & Yan-Li Li, 2023. "The Analysis of Risk Measurement and Association in China’s Financial Sector Using the Tail Risk Spillover Network," Mathematics, MDPI, vol. 11(11), pages 1-35, June.
    • Handle: RePEc:gam:jmathe:v:11:y:2023:i:11:p:2574-:d:1163576
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    References listed on IDEAS

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    1. Adams, Zeno & Füss, Roland & Gropp, Reint, 2014. "Spillover Effects among Financial Institutions: A State-Dependent Sensitivity Value-at-Risk Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 49(3), pages 575-598, June.
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