The Risk Spillover Within a Financial System: Evidence from China

Abstract

In this paper, by proposing a new risk measure called CoRVaR, we explore the risk spillover effect within a financial system consisting of the banking, security and insurance industries. To be precise, we examine the risk spillover effect from each industry to the other. Moreover, we also examine the risk spillover effect from each industry to the system. The dependence structure between industries is modeled using the vine copula. By employing the Monte Carlo simulation technique, an empirical study via data from Chinese financial markets is implemented. Finally, backtesting and comparisons with existing results are also performed. It turns out that the proposed risk measure can well quantify the risk spillover effect. In addition, the copula employed can also well reveal the interdependence structure of the financial system.