https://doi.org/10.1140/epjds/s13688-024-00449-2
Research
Identifying the systemic importance and systemic vulnerability of financial institutions based on portfolio similarity correlation network
Glorious Sun School of Business & Management, Donghua University, Shanghai, China
Received:
24
April
2023
Accepted:
22
January
2024
Published online:
31
January
2024
The indirect correlation among financial institutions, stemming from similarities in their portfolios, is a primary driver of systemic risk. However, most existing research overlooks the influence of portfolio similarity among various types of financial institutions on this risk. Therefore, we construct the network of portfolio similarity correlations among different types of financial institutions, based on measurements of portfolio similarity. Utilizing the expanded fire sale contagion model, we offer a comprehensive assessment of systemic risk for Chinese financial institutions. Initially, we introduce indicators for systemic risk, systemic importance, and systemic vulnerability. Subsequently, we examine the cross-sectional and time-series characteristics of these institutions’ systemic importance and vulnerability within the context of the portfolio similarity correlation network. Our empirical findings reveal a high degree of portfolio similarity between banks and insurance companies, contrasted with lower similarity between banks and securities firms. Moreover, when considering the portfolio similarity correlation network, both the systemic importance and vulnerability of Chinese banks and insurance companies surpass those of securities firms in both cross-sectional and temporal dimensions. Notably, our analysis further illustrates that a financial institution’s systemic importance and vulnerability are strongly and positively associated with the magnitude of portfolio similarity between that institution and others.
Key words: Systemic risk / Portfolio similarity / Systemic importance / Systemic vulnerability
© The Author(s) 2024
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