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Risk Contagion in Chinese Banking Industry: A Transfer Entropy-Based Analysis

Published on Dec 16, 2013in Entropy 2.42
· DOI :10.3390/e15125549
Jianping LiXiaolei19
Estimated H-index: 19
,
Changzhi Liang5
Estimated H-index: 5
(USTC: University of Science and Technology of China)
+ 2 AuthorsDengsheng Wu10
Estimated H-index: 10
(CAS: Chinese Academy of Sciences)
Cite
Abstract
What is the impact of a bank failure on the whole banking industry? To resolve this issue, the paper develops a transfer entropy-based method to determine the interbank exposure matrix between banks. This method constructs the interbank market structure by calculating the transfer entropy matrix using bank stock price sequences. This paper also evaluates the stability of Chinese banking system by simulating the risk contagion process. This paper contributes to the literature on interbank contagion mainly in two ways: it establishes a convincing connection between interbank market and transfer entropy, and exploits the market information (stock price) rather than presumptions to determine the interbank exposure matrix. Second, the empirical analysis provides an in depth understanding of the stability of the current Chinese banking system.
  • References (31)
  • Citations (19)
Cite
References31
Newest
Published on Dec 1, 2014in Algorithmica 0.88
Piotr Berman37
Estimated H-index: 37
(PSU: Pennsylvania State University),
Bhaskar DasGupta24
Estimated H-index: 24
(UIC: University of Illinois at Chicago)
+ 1 AuthorsMarek Karpinski36
Estimated H-index: 36
(University of Bonn)
Threats on the stability of a financial system may severely affect the functioning of the entire economy, and thus considerable emphasis is placed on the analyzing the cause and effect of such threats. The financial crisis in the current and past decade has shown that one important cause of instability in global markets is the so-called financial contagion, namely the spreadings of instabilities or failures of individual components of the network to other, perhaps healthier, components. This lea...
Published on Jul 1, 2013in Journal of Accounting and Economics 3.75
Eric J. Allen4
Estimated H-index: 4
(SC: University of Southern California),
Chad R. Larson5
Estimated H-index: 5
(UH: University of Houston),
Richard G. Sloan39
Estimated H-index: 39
(University of California, Berkeley)
We show that accruals consist of at least two distinct underlying processes, one with positive serial correlation and the other with negative serial correlation. We also find that the accrual reversals characterizing the negatively serially correlated process are predominantly good accruals that correctly anticipate fluctuations in working capital. Accrual estimation error is the least persistent component of earnings, while accruals relating to firm growth are less persistent than cash flows. F...
Published on Jan 1, 2011in Journal of Financial Stability 2.30
Camelia Minoiu17
Estimated H-index: 17
(IMF: International Monetary Fund),
Javier A. Reyes19
Estimated H-index: 19
(UA: University of Arkansas)
We analyze the global banking network using data on cross-border banking flows for 184 countries during 1978–2010. We find that the density of the global banking network defined by these flows is pro-cyclical, expanding and contracting with the global cycle of capital flows. We also find that country connectedness in the network tends to rise before banking and debt crises and to fall in their aftermath. Despite a historically unique build-up in aggregate flows prior to the global financial cris...
Published on Jan 1, 2013
Bhaskar DasGupta24
Estimated H-index: 24
(UIC: University of Illinois at Chicago),
Lakshmi Kaligounder4
Estimated H-index: 4
(UIC: University of Illinois at Chicago)
The recent financial crisis have generated renewed interests in fragilities of global financial networks among economists and regulatory authorities. In particular, a potential vulnerability of the financial networks is the "financial contag ion" process in which insolvencies of individual entities propagate through the "web of dependencies" to affect the entire system. In this paper, we formalize an extension of a financial network model originally proposed by Nier et al. (35) for scenarios suc...
Published on Sep 1, 2011in Expert Systems With Applications 4.29
Qinghua Hu41
Estimated H-index: 41
(PolyU: Hong Kong Polytechnic University),
Lei Zhang85
Estimated H-index: 85
(PolyU: Hong Kong Polytechnic University)
+ 3 AuthorsWitold Pedrycz92
Estimated H-index: 92
(U of A: University of Alberta)
Measures of relevance between features play an important role in classification and regression analysis. Mutual information has been proved an effective measure for decision tree construction and feature selection. However, there is a limitation in computing relevance between numerical features with mutual information due to problems of estimating probability density functions in high-dimensional spaces. In this work, we generalize Shannon's information entropy to neighborhood information entrop...
Published on Aug 1, 2011in Journal of Financial Stability 2.30
Christian Upper8
Estimated H-index: 8
(BIS: Bank for International Settlements)
Researchers increasingly turn to counterfactual simulations to estimate the danger of contagion owing to exposures in the interbank loan market. This paper summarises the findings of such simulations, provides a critical assessment of the modelling assumptions on which they are based, and discusses their use in financial stability analysis. On the whole, such simulations suggest that contagious defaults are unlikely but cannot be fully ruled out, at least in some countries. If contagion does tak...
Published on May 1, 2011in Journal of Banking and Finance 2.21
Paolo Emilio Mistrulli12
Estimated H-index: 12
Interbank markets allow banks to cope with specific liquidity shocks. At the same time, they may be a channel allowing a bank default to spread to other banks. This paper analyzes how contagion propagates within the Italian interbank market using a unique data set including actual bilateral exposures. Since information on bilateral exposures was not available in most previous studies, they assumed that banks spread their lending as evenly as possible among all the other banks by maximizing the e...
Published on Apr 1, 2011
Javier A. Reyes19
Estimated H-index: 19
,
Camelia Minoiu17
Estimated H-index: 17
Published on Jan 1, 2011in Nature 43.07
Andrew G. Haldane24
Estimated H-index: 24
(Bank of England),
Robert M. May129
Estimated H-index: 129
(University of Oxford)
In the run-up to the recent financial crisis, an increasingly elaborate set of financial instruments emerged, intended to optimize returns to individual institutions with seemingly minimal risk. Essentially no attention was given to their possible effects on the stability of the system as a whole. Drawing analogies with the dynamics of ecological food webs and with networks within which infectious diseases spread, we explore the interplay between complexity and stability in deliberately simplifi...
Published on Jun 1, 2008in EPL 1.89
Okyu Kwon8
Estimated H-index: 8
(KU: Korea University),
Jae-Suk Yang12
Estimated H-index: 12
(KU: Korea University)
Using transfer entropy, we observed the strength and direction of information flow between stock indices. We uncovered that the biggest source of information flow is America, while most receivers are in the Asia/Pacific region. According to the minimum spanning tree, the Standard and Poor's 500 Index (GSPC) is located at the focal point of the information source for world stock markets.
Cited By19
Newest
Published on Jul 1, 2019in Emerging Markets Review 2.11
Jingyu Li (CAS: Chinese Academy of Sciences), Yanzhen Yao2
Estimated H-index: 2
(CAS: Chinese Academy of Sciences)
+ 1 AuthorsXiaoqian Zhu7
Estimated H-index: 7
(CAS: Chinese Academy of Sciences)
Abstract To distinguish systematic and idiosyncratic contagion during financial crises has attracted increasing attention because it can shed light on the potential drivers of contagion. However, the existing methods for distinguishing the two types of contagion cannot work with a large number of institutions. Therefore, this paper innovatively proposes a network-based framework which is able to distinguish the two types of contagion among numerous institutions. By applying the framework to the ...
Published on May 10, 2019in Journal of Systems Science & Complexity 0.94
Yiming Chang1
Estimated H-index: 1
,
Shangmei Zhao2
Estimated H-index: 2
+ 0 AuthorsFei Hu (National Development and Reform Commission)
Entropy balancing is introduced to assess the deposit insurance design characteristics in this paper. Applying an extensive duration data including 141 countries from 1960 to 2015, the authors employ the entropy balancing method to simulate the data structure under the implicit deposit insurance system. Then the paper adopts an endogenous treatment effects model and a Heckman two-step selection model to examine payouts choice of the deposit insurance. It is found that entropy balancing can calib...
Published on May 10, 2019in arXiv: Quantitative Methods
Zhong-Qi Kyle Tian , Douglas Zhou9
Estimated H-index: 9
,
David Cai20
Estimated H-index: 20
Transfer entropy (TE) is an attractive model-free method to detect causality and infer structural connectivity of general digital systems. However it relies on high dimensions used in its definition to clearly remove the memory effect and distinguish the direct causality from the indirect ones which makes it almost inoperable in practice. In this work, we try to use a low order and pairwise TE framework with binary data suitably filtered from the recorded signals to avoid the high dimensional pr...
Published on Jul 15, 2018
Konstantinos Iordanou (TUC: Technical University of Crete), Sofia Maria Nikolakaki (BU: Boston University)+ 1 AuthorsApostolos Dollas16
Estimated H-index: 16
(TUC: Technical University of Crete)
Mutual Information (MI) and Transfer Entropy (TE) algorithms compute statistical measurements on the information shared between two dependent random processes. These measurements have focused on pairwise computations of time series in a broad range of fields, such as Econometrics, Neuroscience, Data Mining and Computer Vision. Unlike previous works which mostly focus on 8-bit Computer Vision applications, this work proposes the first generic hardware architectures for the acceleration of the MI ...
Published on Feb 1, 2018in Mechanical Systems and Signal Processing 5.00
Rongxi Wang5
Estimated H-index: 5
(Xi'an Jiaotong University),
Xu Gao2
Estimated H-index: 2
(Xi'an Jiaotong University)
+ 2 AuthorsJiani Kang (Xi'an Jiaotong University)
Abstract As one of the most important approaches for analyzing the mechanism of fault pervasion, fault root cause tracing is a powerful and useful tool for detecting the fundamental causes of faults so as to prevent any further propagation and amplification. Focused on the problems arising from the lack of systematic and comprehensive integration, an information transfer-based novel data-driven framework for fault root cause tracing of complex electromechanical systems in the processing industry...
Published on Dec 1, 2017in Climate Dynamics 4.05
Ankush Bhaskar5
Estimated H-index: 5
,
Durbha Sai Ramesh2
Estimated H-index: 2
+ 2 AuthorsS. Gurubaran1
Estimated H-index: 1
Identification and quantification of possible drivers of recent global temperature variability remains a challenging task. This important issue is addressed adopting a non-parametric information theory technique, the Transfer Entropy and its normalized variant. It distinctly quantifies actual information exchanged along with the directional flow of information between any two variables with no bearing on their common history or inputs, unlike correlation, mutual information etc. Measurements of ...
Published on Sep 2, 2017in Emerging Markets Finance and Trade 0.93
Xi Zhang2
Estimated H-index: 2
(Hunan First Normal University),
Dongmei Guo1
Estimated H-index: 1
(CUFE: Central University of Finance and Economics)
+ 1 AuthorsMingxi Wang2
Estimated H-index: 2
(UIBE: Beijing Institute of Foreign Trade)
In this article, the spatial spillover effects of nonperforming loans in commercial banks are investigated based on Chinese provinces. Panel data from 31 provinces in China covering the period from 2005 to 2014 are used in this study. First, we employ Moran’s I statistic to describe the empirical evidence for the presence of spatial dependencies in provincial nonperforming loans ratio (NPLR) after checking the stationarity of the data by the second-generation panel unit root tests. Then we const...
Published on Sep 1, 2017
Rongxi Wang5
Estimated H-index: 5
(Xi'an Jiaotong University),
Jianmin Gao8
Estimated H-index: 8
(Xi'an Jiaotong University)
+ 3 AuthorsZeming Liang1
Estimated H-index: 1
(Xi'an Jiaotong University)
Published on Aug 17, 2017in PLOS ONE 2.78
Xiurong Chen1
Estimated H-index: 1
,
Yixiang Tian1
Estimated H-index: 1
,
Rubo Zhao1
Estimated H-index: 1
In this paper, we study the cross-market effects of Brexit on the stock and bond markets of nine major countries in the world. By incorporating information theory, we introduce the time-varying impact weights based on symbolic transfer entropy to improve the traditional GARCH model. The empirical results show that under the influence of Brexit, flight-to-quality not only commonly occurs between the stocks and bonds of each country but also simultaneously occurs among different countries. We also...
Published on Aug 1, 2017in Economic Modelling 2.06
Yanzhen Yao2
Estimated H-index: 2
(CAS: Chinese Academy of Sciences),
Jianping LiXiaolei19
Estimated H-index: 19
(CAS: Chinese Academy of Sciences)
+ 1 AuthorsLu Wei2
Estimated H-index: 2
(CAS: Chinese Academy of Sciences)
The issue of identifying systemically important banks has gained prominence since the recent global financial crisis in 2007. However, the extant methods either neglect the adverse impact on the financial system posed by a bank or ignore the various interactions among banks. To resolve this issue, the objective of this study is to put forward an expected default based score (EDBS) that overcomes the drawbacks of the existing methods from the perspective of contagion risk. This indicator measures...