Network Effects and Characteristics of Cross-Industrial Tail Risk Spillover in China

Abstract

In recent years, the Chinese capital market has suffered several violent shocks, and the characteristics of systemic risk contagion across industries and markets have become increasingly important. It brings great potential danger to the stability of financial markets. Therefore, exploring the risk spillover among the real sectors has gradually attracted the attention of scholars. This paper examines the cross-industrial tail risk spillover network in the Chinese financial market. The characteristics and the dynamic contribution of each industry in the tail risk transmission chains are explored. We use the ∆CoES-ENGDFM-LVDN model based on monthly data from 2006 to 2020 to measure the tail risk of 28 industries in China and form a cross-industrial tail risk spillover network. The results show that different industries have different levels of spillover and importance in the network. Tail risk mainly spills over from the nonfinancial sector to the financial sector. The nonbank financial industry is the main recipient of tail risk spillover and is becoming progressively more important in the risk network. In addition, with the promotion of industrial structure, emerging industries such as communications, computers, and health care have begun to play more important roles in the tail risk spillover network in China. This paper not only enriches the research in the areas of tail risk spillover and systemic risk, but also has implications for regulators to maintain financial stability and prevent financial risks.