THE RELATIONSHIP BETWEEN INSURANCE INDUSTRY AND BANKING SECTOR IN CHINA: ASYMMETRIC GRANGER CAUSALITY TEST

With the development of the financial sector, the interaction between insurance and banking gradually increased. Traditional Granger causality tests indicate a long-term relationship between the banking and insurance sectors and the development of insurance industry Granger-causes that of the banking sector. Considering the possibly different causal impacts of positive and negative shocks, this research employs asymmetric Granger causality test to further examine the relation. Results show that negative shocks in the insurance and banking sector Granger-cause each other, the positive shocks in these two sectors do not have significant Granger cause with each other. Moreover, the positive (or negative) shocks in the insurance sector Granger cause the opposite direction of shocks in the banking sector. According to the test results, regulatory authorities should pay more attention to the systemic risk resulted from the downturn of insurance and banking sectors, and the insurance industry should be further strengthened, since the insurance sector plays a more active role in the insurance-banking nexus and can promote the stability and development of the financial system.