Research On Return And Volatility Spillover Of China's Financial Industries

Financial risk prevention is the premise and foundation of China's financial development.In recent years,with the acceleration of mixed operation and financial innovation,the interaction and cooperation of China's financial institutions has reached unprecedented breadth and depth,leading to the ever-increasing interconnection among financial industries,which in turn makes cross-industry risk contagion easier than ever.Therefore,risk identification and management abilities are highly demanded.It has become a hotspot and challenge in modern financial analysis to accurately describe the interconnectedness of financial institutions as well as to properly examine the effect of risk spillover,which are significantly important for financial development and financial supervision.At present,economists mainly focus on the local linkages in financial system,such as the correlation between banking and another financial industry,but ignore the rapidly developing non-bank finance as well as other complex and diverse interlinkages in the financial network.Besides,existing empirical models cannot fully reflect the time-frequency characteristics of cross-industry spillovers.Therefore,based on the perspective of information spillover,this paper centers on both return spillover and volatility spillover of four major financial industries in China-banking,securities,insurance and trust industry.Diebold ? Yilmaz spillover index,its dynamic version(TVP-VAR)and its frequency version(Baruník ?K(?)ehlík)are employed to describe the information transmission among financial industries,so as to examine the evolution of cross-industry risk contagion and to capture the frequency characteristics of price/risk co-movement.This paper selects the daily stock data from September 20,2010 to November 17,2021.It employs spillover index to study static spillover effect,which reveals return spillover and volatility spillover network among financial industries in both time and frequency domain,followed by the dynamic analysis of spillover effect based on time-varying VAR model.Firstly,this paper finds evidence of significant spillover effect in China's financial industries.In return spillover,securities industry is the biggest net exporter and insurance industry is the second biggest,making them the center of price co-movement.In volatility spillover,securities and insurance industry are the biggest net receivers,making them the center of risk contagion while banking industry mainly serves as the intermediary of risk transmission.Trust industry is relatively independent in both return and volatility spillover.Secondly,return spillovers occur in the short term and react quickly to external shocks(within 1 week),which means the price comovement dominated by securities industry is a temporary effect.Volatility spillovers occur in the long term and show lasting effects(more than 1 month),which means risk contagion has serious and persistent impact on securities and insurance industry.Third,the total spillover effect is stable and time-varying.It has a steady performance in the period of economic stability,rises rapidly and fluctuates violently in times of turbulence,and declines significantly under supervision policies.In addition,risk spillover is asymmetrical in accumulation and reduction,indicating that the increased risks caused by external shocks need longer time to dissipate,which reflects the persistence of volatility shocks from a dynamic perspective.Fourthly,the directional spillover and net spillover effect of each financial industry also have different characteristics and trends,which once again confirms the leading position of securities and insurance industry in return spillover,and proves any industry has the potential to dominant risk spillover effect due to specific external shocks.The conclusions are of great significance for investors to optimize their portfolios,and for regulatory authorities to improve the prevention and resolution of financial risks,which further contributes to more effective financial supervision.