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Quantifying interconnectedness and centrality ranking among financial institutions with TVP-VAR framework
Hai-Chuan Xu1,2, Fredj Jawadi3, Jie Zhou1
1School of Business, East China University of Science and Technology, 130 Meilong Road, Shanghai, 200237 Shanghai China.
China's 2017 housing policies amplified financial risk by increasing interconnectedness among institutions. This dynamic shift impacts systemic risk, requiring targeted regulatory oversight for financial stability.
Area of Science:
- Financial Economics
- Systemic Risk Analysis
- Quantitative Finance
Background:
- Financial institutions' interconnectedness amplifies systemic risk.
- Understanding dynamic spillover effects is crucial for financial stability.
- China's real estate market significantly influences its financial system.
Purpose of the Study:
- To analyze dynamic spillover effects in China's financial system.
- To assess the impact of 2017 house price control policies on financial risk.
- To identify systemically important financial institutions.
Main Methods:
- Time-varying parameter vector autoregression (TVP-VAR) model.
- Analysis of dynamic spillover effects and interconnectedness.
- Centrality measures for ranking financial institutions.
Main Results:
- The 2017 house price control policies significantly increased China's financial system risk.
- Interconnectedness declined pre-2017 but increased post-2017 with real estate market changes.
- Diverse spillover effects across sectors, with any sector potentially contributing to systemic risk.
Conclusions:
- Policy interventions in the real estate market have profound effects on financial system interconnectedness and risk.
- Dynamic analysis reveals evolving risk contributions from different financial sectors.
- Ranking systemically important institutions aids regulators in effective market intervention and policy formulation.
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