Quantifying connectedness between extreme risk and investor sentiment: Evidence from interconnected multilayer networks

This article proposes a novel interconnected network framework, including lagged and contemporaneous interconnected networks, to asses connectedness in the financial system. We apply the proposed approach to examine the lagged and contemporaneous connectedness between extreme risk and investor sentiment in Chinese financial institutions. Our results suggest the spillover effect of extreme risk to investor sentiment is more significant than the inverse direction. Notably, contemporaneous information spillovers play a key role in the connectedness between extreme risk and investor sentiment. Furthermore, we find that the inter-layer connection structure is heterogeneous in the lagged and contemporaneous interconnected networks. Finally, we discuss the drivers of inter-layer connectedness and find that the securities sector is inter-layer systemic importance. Meanwhile, investors in Ping An Bank also contribute to the interconnectedness between extreme risk and investor sentiment.