Bank tail risk in China

Abstract

In this study, we investigate the tail dependency between bank stocks in China and 35 common risk factors. We measure univariate and multivariate conditional tail risk probabilities. The evidence indicates that tail events from risk factors in the banking, security trading, real estate, and energy industries have the largest effects on the realization of extreme returns from Chinese bank stocks. The univariate conditional tail risk is considerably higher than the unconditional tail risk. The impact of multiple tail events from several risk factors occurring simultaneously is much stronger than tail events from one single risk factor. In general, there is a stronger cross-market tail linkage between emerging market risk factors and bank stocks in China when compared with developed market risk factors. However, the cross-market tail linkage between developed market risk factors and bank stocks in China rose sharply during the 2008 financial crisis.