Does financial leverage volatility induce systemic financial risk? Empirical insight based on the Chinese fintech sector

Abstract

Financial leverage volatility is a significant factor contributing to the formation of systemic financial risk, which is more apparent in China's fast-growing fintech (financial technology) field. Using the Conditional Value-at-risk approach (ΔCoVaR) risk metric, the generalized autoregressive conditional heteroskedasticity (Structural Vector Autoregression with Stochastic Volatility model [SV-TVP-SAVR]) model, and the generalized forecast error variance decomposition (Tvpdy) model, this paper discusses how financial leverage volatility shocks fintech sectoral risks and the evolution of the risk within fintech under the shocks on the basis of the classification criteria of the Chinese fintech enterprise database and daily trading data of A-share listed companies. The statistical results show that financial leverage volatility causes risk changes across fintech sectors, which is especially significant during economic downturns or government interventions. Also, under the shock of financial leverage volatility, the fintech sectors will absorb or diffuse risks outward through spillover channels, with significant differences in the risk spillover conditions of different types of sectors.Finally, the fintech sector can produce a contagion system with the Internet consumer finance, payment, and Internet microcommercial credit sectors as the core of risks, resulting in a systemic risk crisis. Our findings have major implications for Chinese regulators to balance financial leverage and prevent systemic risks in the fintech sector.

Big data management algorithms in artificial Internet of Things-based fintech

“…AI-based metaverse fintech, big data-driven investment decisions, virtual asset and real estate transactions and transferability, AI-powered financial advising, and immersive digital banking (Gonçalves et al, 2023;Li et al, 2023;Rahmani et al, 2023) develop on blockchain and cryptocurrency technologies, financial data modeling and visualization tools, and Internet of Thingsbased digital twins (Ben Romdhane et al, 2023;Lai et al, 2023;Yan, 2023) across the decentralized, scalable, and interoperable infrastructure of the extended reality-and blockchain-based metaverse. AI-enhanced financial, payment, and banking services (Khan et al, 2023;Rahmani et al, 2023;Wang et al, 2023) improve customer experiences and expectations (Jiang, 2023;Lai et al, 2023;Zhao et al, 2023) by managing and leveraging a seamless flow of data (Jareño & Yousaf, 2023;Mirza et al, 2023b;Su & Xu, 2023), boosting revenue and profitability (Gonçalves et al, 2023;Wu et al, 2023;Zheng et al, 2023), and building hyper-personalized and tailored digital products (Awais et al, 2023;Babaei et al, 2023;Ha, 2023) by use of mobile wallets, algorithmic trading tools, cloud-assisted digital systems, and realtime financial data (Edo et al, 2023;He et al, 2023b;Mahmud et al, 2023).…”

“…Fintech development enables bank credit expansion (Wu et al, 2023), with less significant impact in relation to state-owned commercial banks and more relevant influence as regards small banks. Financial leverage volatility is pivotal in the systemic financial risk constitution (Zheng et al, 2023), bringing about risk changes throughout fintech industries during economic downturns, with risks assimilated or distributed outward across spillover channels. Fintech lending facilitates credit services and financial inclusion, with machine learning algorithms deployed in relation to lending data (Babaei et al, 2023) to articulate creditworthiness estimates.…”

“…AI-enabled financial and banking services, big data management systems, and seamless mobile payments, transactions, investments, and budgeting based on virtual token currency exchanges and digital wallets and assets (Doumpos et al, 2023;Mirza et al, 2023a;Rabbani et al, 2023) increase customer loyalty and engagement through coherent real-time immersive and interactive experiences (Awais et al, 2023;Babaei et al, 2023;Ha, 2023). AIpowered and virtual reality financial advice and support (He et al, 2023a;Lai et al, 2023;Sampat et al, 2023) enable frictionless blockchain transactions as regards digital assets, customized and personalized blockchainand crypto-based financial services, and virtual credit and lending (Caragea et al, 2023;Jareño & Yousaf, 2023;Qiu et al, 2023) by use of big data analytics and cloud computing technologies (Gonçalves et al, 2023;Zheng et al, 2023).…”

“…Immersive virtual banking and financial technology (fintech) services optimize virtual financial planning and products (Doumpos et al, 2023;He et al, 2023a;Mirza et al, 2023a;Rabbani et al, 2023), financial data management and transaction systems (Awais et al, 2023;Babaei et al, 2023;Ha, 2023), and investment decisions in the metaverse economy through automatic data collection. Harnessing reporting quality assessment and data visualization tools, we fill the research gap in the current literature by proving that fintech services configure frictionless, instant, affordable, and flexible digital payments (Khan et al, 2023;Rahmani et al, 2023;Wang et al, 2023;Yan, 2023), AI-powered transaction screening and monitoring (Chen et al, 2023;Lai et al, 2023;Mariani et al, 2023;Singh, 2023), and cloud-based instant payment processing through digital wallets, virtual cards, credit decision automation, peer-to-peer payment networks, and money-transfer apps (Gonçalves et al, 2023;Sampat et al, 2023;Zheng et al, 2023).…”

Share pledging: Measuring margin call pressure and its influence on liquidity commonality

“…Financial leveraging, while a powerful tool for wealth maximization, has often been at the center of catastrophic economic downturns (Acharya & Thakor, 2016; Zheng et al, 2023), as history grimly narrates through events like the Great Depression and the 2008 subprime mortgage crisis. In these contexts, the fragility of market liquidity became starkly evident, highlighting the systemic impact of excessive leveraging and the domino effect triggered by liquidity evaporation.…”