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Business & Economics

CORRELATED NETWORK STRUCTURE OF LISTED BANKS FROM THE PERSPECTIVE OF VOLATILITY SPILLOVER: EMPIRICAL EVIDENCE FROM CHINA¹¹
Hongbing Ouyang, Xiang Gao, Yong Zhi, Jinghan Cai

ABSTRACT. The capital shortfall of highly interconnected banks can spill over into other banks, which may lead to a series of financial contagion and even a systemic event. To identify the correlation characteristics and influencing factors of risk contagion among banks, using generalized variance decomposition method and the sample data of Chinese listed banks from 2008 to 2017, an interbank correlation network based on stock price volatility was built. Then, the correlation characteristics, risk contagion, evolution law of the endogenous network structure, and influencing factors were analyzed. Results show that the total connectedness of Chinese banks with time is cyclical. Moreover, this connectedness is positively correlated with systemic risk. An individual bank has significant heterogeneity in risk and information spillovers. However, banks, as providers of risk and information, show noticeable differences, whereas banks, as receivers, are less affected by other banks. Systemic exogenous shocks make the originally structured banking financial network highly unified and converged. Then, this network evolves into a new structured network as the shock subsides. The process is similar to the reintegration and redistribution of resources. The conclusions of this study may help regulators to increase their understanding on the operating rules of the financial system, prevent systemic risks, and practice macroprudential regulation .

KEYWORDS:  volatility spillover, network structure, risk contagion, connectedness.

¹¹Acknowledgment:  :This study was supported by the Major Research Plan of National Natural Science Foundation of China, "Research on Econometric Modelling and Prediction" (Grant No.71991473), Humanities and Social Sciences Planning Projects of Ministry of Education "The Identification Approach and Evaluation System of Systemic Important Financial Institutions" (Grant No.19YJA790067), and Collaborative Innovation Center of Industrial Upgrading and Regional Finance (Hubei).