Systemic Risk Contribution and Contagion of Industrial Sectors in China: From the Global Financial Crisis to the COVID-19 Pandemic

Jianxu Liu,Yangnan Cheng,Songsak Sriboonchitta,Yefan Zhou,Xiaoqing Li,Hongyu Kang,Alfred Peris

doi:10.1155/2021/9373614

Jianxu Liu, Yangnan Cheng + Show 5 more

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https://doi.org/10.1155/2021/9373614

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Abstract

This paper investigates the risk contribution of 29 industrial sectors to the China stock market by using one-factor with Durante generator copulas (FDG) and component expected shortfall (CES) analyses. Risk contagion between the systemically most important sector and other sectors is examined using a copula-based ∆CoVaR approach. The data cover the 2008 global financial crisis and the beginning of the COVID-19 pandemic. The empirical results show that the banking sector contributed most to systemic risk before and during the global financial crisis. Nonbank finance became equally important in 2020, and the COVID-19 pandemic promoted the position of the computer and pharmaceuticals sectors. The spillover effect diminishes over time, but there remains risk contagion between sectors. The risk spillover trend is consistent with that of systemic risk.

Highlights

In finance, it is acknowledged that severe financial crises are inseparable from systemic risk, which is the risk of an entire market or financial system collapsing rather than the failure of individual parts
It is the risk of financial instability becoming so widespread that it impairs the functioning of a financial system to the point where economic growth and welfare suffer materially [1]. ere are three main causes of systemic risk: macro shocks that negatively affect the financial market, contagion risk that spreads “horizontally” inside the financial system, and the consequences of imbalances that build up over time. e complexity and destructiveness of systemic risk raise a key question for policymakers: how to limit the build-up of systemic risk and contain crisis events when they happen
Taking the value of ∆CoVaR given in Figure 11, we find that the spillover effect was at its strongest before the global financial crisis (GFC) and that it decreased over time until COVID-19 drove it up. is means that even a crisis that does not originate from the financial industry will increase the spillover effect between sectors, and a strong spillover effect in the pre-GFC period could have been taken as an early warning of a severe crisis

Summary

Introduction

It is acknowledged that severe financial crises are inseparable from systemic risk, which is the risk of an entire market or financial system collapsing rather than the failure of individual parts. As a major contributor to such crises, systemic risk has been studied intensively in the literature (e.g., Borri and Giorgio [2], Gavronski and Ziegelmann [3]). Both the GFC and the COVID-19 pandemic have been found to increase systemic risk in some of the most affected countries, and systemic risk has caused great damage to financial markets in those countries.

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