Abstract
This study considers the effect of an industry’s network topology on its systemic risk contribution to the stock market using data from the CSI 300 two-tier industry indices from the Chinese stock market. We first measure industry’s conditional-value-at-risk (CoVaR) and the systemic risk contribution (ΔCoVaR) using the fitted time-varying t-copula function. The network of the stock industry is established based on dynamic conditional correlations with the minimum spanning tree. Then, we investigate the connection characteristics and topology of the network. Finally, we utilize seemingly unrelated regression estimation (SUR) of panel data to analyze the relationship between network topology of the stock industry and the industry’s systemic risk contribution. The results show that the systemic risk contribution of small-scale industries such as real estate, food and beverage, software services, and durable goods and clothing, is higher than that of large-scale industries, such as banking, insurance and energy. Industries with large betweenness centrality, closeness centrality, and clustering coefficient and small node occupancy layer are associated with greater systemic risk contribution. In addition, further analysis using a threshold model confirms that the results are robust.
Highlights
Introduction and literature reviewAfter the financial crisis in 2008, the stability of the financial system has gradually become the focus of the industry, academia and regulators
Kaufman and Scott [1] define systemic risk as "the probability of collapse of individual or component of a group resulting in the risk of an overall system or the probability of loss of the system, and the collapse of an overall system arises from the domino effect of a single individual which has suffered the risk." The International Monetary Fund, the Financial Stability Board and the Bank for International Settlements (BIS) [2] state that systemic risk refers to a type of risk that may damage the financial system partially or totally and create a wide range of disturbances in financial services and have serious impact on the real economy
This paper investigates the effects of the network topology of a stock industry brings on the systemic risk contribution of various industries
Summary
Introduction and literature reviewAfter the financial crisis in 2008, the stability of the financial system has gradually become the focus of the industry, academia and regulators. Huang et al [29] studied the effects of financial institutions’ topology in the financial network on their systemic risk contribution and found that they were correlated. A common finding is that the topology of the industry index correlation network changes during a crisis [30, 31]; it is natural to investigate systemic risk from the perspective of the industry index network in the stock market.
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