The Risk Spillover Effects and Network Connectedness Between Real Estate and Other Sectors in China

Using a high-dimensional time-varying parameter vector autoregression framework, we propose a volatility spillover network to analyze risk contagion direction, path, and intensity under supply-demand relationships when important events break out in the real estate market. We characterize daily return volatility spillovers across firms from January 2010 to April 2022 and find a high correlation among these firms because the real linkage based on industrial chain structure strengthened. Meanwhile, the outbreak of essential events in the real estate market corresponds to several peak values of return volatility. The empirical results show that excessive correlation induces risk contagion across the network, and spillover effects are significant under extreme market conditions, manifesting as cross-industry contagion and intersectoral diffusion. The volatility spillover effects within real estate firms are higher than spillover effects across markets. In addition, the industrial chain structure better explains the mechanism of cross-industry risk contagion, firms located upstream of the real estate industry chain are risk receivers, and those located downstream are risk spillovers. Real estate firms mainly spread risks to financial institutions and firms that provide production goods. Our findings are of constructive significance to the related policies by regulatory authorities and provide multi-angle empirical evidence support for the risk supervision theory of "too connected to fail."