Measuring systemic risk and dependence structure between real estates and banking sectors in China using a CoVaR‐copula method

Abstract

The aim of this paper is to study the dependence structure between the real estate and the banking sectors in China. Various time‐varying symmetric and asymmetric copula functions of the elliptical and Archimedean families are used to model the underlying dependence structure. Furthermore, it analyses risk spillover effects between these two sectors by quantifying three risk measures, namely, the value at risk (VaR), the conditional value at risk (CoVaR) and the delta conditional value at risk (ΔCoVaR). Over the period from January 2005 to March 2019, the empirical results show that there exists evidence of significant and symmetric dependence structure between these two sectors and Student's t copulas best capture this dependence. Moreover, we find that there are significant risk spillover effects from the real estate to the banking sectors, and vice versa. By considering different periods of financial distress, the empirical results show that risk spillover effects during the 2015–2016 Chinese stock market turbulence period are much significant than that during the 2007–2008 global financial crisis. Furthermore, the statistical tests show that the real estate sector contributes significantly to systemic risk of the banking sector, and vice versa. Finally, some useful implications are summarized for investors and policymakers.

SYSTEMIC RISK’s effect ON THE STABILITY OF THE BANKING SECTOR: EVIDENCE FROM SAUDI ARABIA

“…The banking sector is considered one of the most important sectors that contribute to the financial reform processes and move the wheel of growth by mobilizing national savings and re-injecting them into various economic sectors in the form of loans, as the Studies in Economics and Business Relations 55 banking sector contributes 10.3% of the Saudi GDP (SAMA, 2019). Currently, the banking sectors around the world are under great the increase in the systemic risks that are exposed, therefore the existence of a state of banking instability that may cause a new financial crisis ( 2020), Systemic risk is measured as the amount by which a bank's capital is reduced due to a structured event in which the financial system is completely deficient in capital and is known as regular expected deficit, this concept implies the amount of the market value of shares (Cao, 2021). In which the bank falls below its target value.…”

How does CEO power and overconfidence affect the systemic risk of China’s financial institutions?

“…Numerous studies have explored the factors that affect financial institutions' systemic risk with the primary objective of decreasing systemic risk and improving the financial system's stability. The firm-level key determinants of systemic risk have been thoroughly studied for the financial system (e.g., Ilin and Varga, 2015;Zeb and Rashid, 2019;Braiek et al, 2020;Cao, 2020;Choi et al, 2020;Kapinos, 2020;Wen et al, 2020). However, studies have ignored the behavioral perspective, which can provide useful new insights, including the overconfidence and CEO power perspective.…”