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Empirical Economics

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18-01-2021

Does cross-shareholding lead to China's stock returns comovement? Evidence from a GMM-based spatial AR model

Authors: Yun Feng, Xin Li

Published in: Empirical Economics | Issue 6/2021

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Abstract

This investigation investigates how the cross-shareholding network leads to stock returns’ comovement and makes an empirical test using a spatial autoregressive model with multiple weighted matrices. The cross-shareholding network leads to a significant and considerable positive spatial dependence of stock returns, which is roughly equivalent to the local dependence. Besides, we provide evidence that the strength of comovements is closely related to the network density. Vertices with higher out-degree (investing more firms) take on more spillover effects. In contrast, the cross-shareholding ratio seems not to play a critical role because of its low level and the exponential decline influence mechanism. Changes of the cross-shareholding network measurement suggest the robustness of our result. The result suggests that the cross-shareholding could strengthen the stock comovement effect. The policy implication is that the control of this comovement should focus on the network structure: reducing network density by finding vertices with higher degrees rather than arbitrary restrictions of shareholding ratios.

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This is calculated by using data from the WIND database. The limit impact can due to the exponential decline of indirect shareholding: suppose A holds 20% shares of B’s equity and B holds 20% shares of C’s equity, the initial market value of A, B and C are the same (M). If C’s stock price falls by 10%, then B losses \(10\%*20\%*M\), and A losses \(10\%*20\%*20\%*M\), which shows an exponential decline.

Though it is not rigorous when investigating the relation between estimators that are calculated from the sample statistically, the positive correlation of \({\rho }_{c}\) and the network density still reflects that the network density may play an important role in cross-shareholding risk contagion.

The degree of a vertex is its most basic network structural property, the number of its adjacent edges.

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Title: Does cross-shareholding lead to China's stock returns comovement? Evidence from a GMM-based spatial AR model
Authors: Yun Feng
Xin Li
Publication date: 18-01-2021
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 6/2021
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-020-02002-2

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