Equity volatility connectedness across China’s real estate firms and financial institutions

The study investigates the dynamic equity volatility connectedness across the major real estate firms, banks, and other financial institutions in China. Based on the relative level of equity volatility connectedness, the study also examines the systemic importance of real estate firms and banks. The study shows that despite widespread worries about potential real estate bubbles in China, total directional connectedness from real estate firms to banks has decreased over the sample period. In contrast, total directional connectedness from banks to the real estate firms and to the financial institutions has become stronger over the sample period, which implies stronger risk originating from the banking sector. The study also shows that size plays an important role in determining the systemic importance of a real estate firm to the banking sector. The largest real estate firm displays the highest average systemic importance ranking. However, size does not appear to be the determinant factor of the systemic importance of a bank to the financial system. The largest bank shows the lowest average systemic importance ranking and 70% probability of being the least or second least systemically important bank in the long run.