Can investor sentiment connectedness predict banking systemic risk: evidence from China

Investor sentiment connectedness (TCI), which depicts the aggregate effect of investor sentiment contagion, is documented as a potential risk contagion channel and plays an essential role in the evolution of systemic risk. This study applies the TVP-VAR model to construct TCI and examines whether TCI can predict banking systemic risk. Empirical results show that an increase in TCI strongly and stably predicts increasing banking systemic risk over the next month. Additionally, both in-sample and out-of-sample results indicate that TCI provides incremental information for banking systemic risk prediction.