Is There a Bright Side to the Aggregate Volatility Risk of the Bank System? ---A New Perspective from Corporate Innovation Quality in China

In this paper, we apply the banking sector volatility connectedness proposed by Diebold and Yilmaz 2014 Diebold, F. X., and K. Yilmaz. 2014. On the network topology of variance decompositions: Measuring the connectedness of financial firms. Journal of Econometrics 182 (1):119–34. doi:10.1016/j.jeconom.2014.04.012.[Crossref], [Web of Science ®] , [Google Scholar] to measure the dynamic aggregate volatility risk of the bank system. Using this measure, we study how the aggregate volatility risk of the bank system affects the innovation quality of non-financial listed firms in China. This study finds a positive relationship between the banking sector volatility connectedness and corporate innovation quality. Financial constraints and bank supervision are two plausible channels through which banking sector volatility connectedness could affect corporate innovation quality. In addition, the positive effect of banking sector volatility connectedness on firm innovation quality is suppressed for bank-related firms, and during high economic policy uncertainty and post-2015 stock market crash periods. The results are consistent to a battery of robustness test. Our empirical results present a novel finding that an appropriate high aggregate volatility risk of the bank system has a bright side for company innovation.