Do China's Non-Financial Firms Affect Systemic Risk?

This article investigates the contribution of non-financial firms to systemic risk in the entire financial system and the corresponding firm-specific determinants. Thus, we develop a new measure of systemic risk with a test of our hypothesis that separates systemic risk from systematic risk. We also consider the firm-level determinants of contributions to systemic risk using a fixed-effects model and a logit model. Using data on companies in the CSI 300 index from 2008 to 2016, we find that our extreme value theory (EVT)-copula method is a good fit for testing the joint probability distribution of extreme returns as well as diverse dependence patterns with asymmetry and non-linearity characteristics. The empirical results provide evidence against the marginal expected shortfall (MES) method without a mechanism to test the statistical significance of determination. Several non-financial firms, though not all financial institutions, can generate significant spillover effects on the financial system. Our regression results suggest that, among firms with a significantly positive contribution to systemic risk, smaller firms have greater spillover effects on the financial system in China. Moreover, economy-wide systemic risk information and dynamic identification on systemically important firms deserve more attention in terms of macro-prudential regulation.