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Systemic Risk of China’s Financial Sector: Evidence from the Stock Market

Liu, Yixian LU (2016) EKHM52 20161
Department of Economic History
Abstract
China, with the fast developing financial market, experienced two dramatic stock market crisis in recent ten years under government constrains. Thus, monitoring the systemic risk in China is crucial and meaningful. This paper applies CoVaR methodology to measure the dynamic systemic risk of China’s financial market from 1996 to 2016. The financial market is divided into bank and non-bank sectors. Security, insurance and diversified financial institutions are included in the non-bank sector. Market capitalization of each sector is conducted to calculate the Value at Risk combing with state variables of US treasury return and domestic real estate return loss. ∆CoVaR and Exposure-∆CoVaR are the indicators of the systemic risk. The estimation... (More)
China, with the fast developing financial market, experienced two dramatic stock market crisis in recent ten years under government constrains. Thus, monitoring the systemic risk in China is crucial and meaningful. This paper applies CoVaR methodology to measure the dynamic systemic risk of China’s financial market from 1996 to 2016. The financial market is divided into bank and non-bank sectors. Security, insurance and diversified financial institutions are included in the non-bank sector. Market capitalization of each sector is conducted to calculate the Value at Risk combing with state variables of US treasury return and domestic real estate return loss. ∆CoVaR and Exposure-∆CoVaR are the indicators of the systemic risk. The estimation results reveal bank sector contributes the most to the total risk and it is also the most at risk sector facing the crisis. The risk contribution of diversified financial institutions increase during the crisis infers the rapid development of this sector in the market. Exposure-∆CoVaR of all the sectors share the same law. The risk exposure to the whole financial market increases before the crisis and then sharply decreases during the distress. The strong positive correlation between VaR and ∆CoVaR in China allows the market regulations to be sufficient based on sector level. This paper provides general suggestions for the market regulations and plots the dynamic systemic risk comovements with the sectors. (Less)
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author
Liu, Yixian LU
supervisor
organization
course
EKHM52 20161
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Systemic Risk, CoVaR, China
language
English
id
8891047
date added to LUP
2016-09-19 13:37:31
date last changed
2016-09-19 13:37:31
@misc{8891047,
  abstract     = {China, with the fast developing financial market, experienced two dramatic stock market crisis in recent ten years under government constrains. Thus, monitoring the systemic risk in China is crucial and meaningful. This paper applies CoVaR methodology to measure the dynamic systemic risk of China’s financial market from 1996 to 2016. The financial market is divided into bank and non-bank sectors. Security, insurance and diversified financial institutions are included in the non-bank sector. Market capitalization of each sector is conducted to calculate the Value at Risk combing with state variables of US treasury return and domestic real estate return loss. ∆CoVaR and Exposure-∆CoVaR are the indicators of the systemic risk. The estimation results reveal bank sector contributes the most to the total risk and it is also the most at risk sector facing the crisis. The risk contribution of diversified financial institutions increase during the crisis infers the rapid development of this sector in the market. Exposure-∆CoVaR of all the sectors share the same law. The risk exposure to the whole financial market increases before the crisis and then sharply decreases during the distress. The strong positive correlation between VaR and ∆CoVaR in China allows the market regulations to be sufficient based on sector level. This paper provides general suggestions for the market regulations and plots the dynamic systemic risk comovements with the sectors.},
  author       = {Liu, Yixian},
  keyword      = {Systemic Risk,CoVaR,China},
  language     = {eng},
  note         = {Student Paper},
  title        = {Systemic Risk of China’s Financial Sector: Evidence from the Stock Market},
  year         = {2016},
}