Modeling the Paths of China’s Systemic Financial Risk Contagion: A Ripple Network Perspective Analysis

Considering financial contagion has ripple effects, this paper proposes using contagion ripple-spreading network model to reveal the paths of financial contagion from different contagion source to the whole Chinese financial system, and study financial institutions’ systemic importance. We first study the contagion ripple-spreading process triggered by oil market. Then we select four financial institutions from banks, brokerages, insurance and other institutions as contagion source respectively to study the how contagion will spread once these financial institutions trigger financial contagion. Finally, centrality comprehensive evaluation method is applied with heterogeneous networks generated from different contagion ripple-spreading processes to study the institutions’ systemic importance. The empirical results show that the contagion triggered by oil market first spreads to other financial institutions, and then to banks, brokerages and insurance. The contagion triggered by a financial institution first spreads in financial sectors that the contagion source belongs to, and then to other sectors. Moreover, most brokerages and banks have highest systemic importance. Insurance and the rest of brokerages, banks have middle level of systemic importance. Other financial institutions are the least important institutions.