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Systemic Risks and Spillovers in the Stock Market of China: A Sectoral Analysis

This paper investigates how risks spread across sectors of the stock market in China. Using graph theory and a recently developed time series technique, we are able to identify the most important sector in the market and the patterns of risk spillovers across sectors over time. Unlike the standard econometric modelling, the graph theory enables us to approach this question in a more reader-friendly way. Empirical results show that the industrial sector plays the most important role and should thus be considered a systemically important sector in the stock market of China. The spillover structure is found to be time-varying. While the industrial sector dominates the system for most of the time, other sectors, such as the consumer discretionary sector, also appear occasionally as the central sector. Our empirical results also indicate that the simple correlation based approach can produce equally useful information as the more advanced econometric models can.