Connecting the stocks of major energy firms in China to identify the systemic risk

Abstract

This study mainly identifies systemic risks among energy firm stocks. By using a financial network approach on 198 major energy firms in China, the study finds that energy firms are accompanied with systemic risk due to extensive stock return and stock risk connections. Return connection is less severe and long-lasting than risk connection, but they are all buffeted to varying degrees by economic activities, such as stock market volatility, energy policy, and public event like COVID-19. Structural analysis further finds that heterogeneity and asymmetry exist in energy firms' bidirectional ability of price and risk information processing; relatively extreme asymmetry cases can be observed from risk connection ability. Multiple centrality indicators screen out some systemically important energy firms from exchanges of both return and risk information. All these characteristics could provide implications for policy making, corporate response, and portfolio construction.