Global Systemic Financial Risk Spillovers and Their External Shocks

Abstract

The shock of the global financial crisis sparked widespread concern across the world about systemic financial risk and led to the reexamination of regulatory mechanisms. The traditional principle of “too big to fail” underwent a transformation into the new idea of “too interconnected to fail.” We used Directed Acyclic Graph (DAG) technology and network topology analysis to examine the dynamic evolution of global systemic financial risk and the risk trends in global financial markets from the perspective of network connectivity. Our findings show that financial markets in the Chinese Mainland are net receivers of risk spillovers and that systemic financial risk has a clear cross-market contagion effect due to a global volatility spillover scale of 64 percent. To maintain the stability and security of China’s financial markets, consideration should be given to the regulatory precept of “too interconnected to fail” in establishing macro-prudential risk prevention mechanisms.