BOFIT Seminar - Yongjian Lyu (Southwest University of Finance and Economics) - Risk Spillovers from the Chinese Real Estate Market to the Financial System: Does Monetary Policy Uncertainty Matter?
Co-author: Heling Yi (Southwest University of Finance and Economics)
The slowdown in China's real estate market in recent years has sparked concerns among regulatory bodies and global investors. The potential crisis originating from the real estate sector has garnered significant attention from scholars. Given the connection between real estate and the financial industry, a crisis in the former can swiftly transmit risks to the latter, as seen in the 2007 subprime mortgage crisis. This paper examines the hypothesis that monetary policy uncertainty influences real estate market stability, intensifying its impact on the financial system. Empirical findings show that shocks in monetary policy uncertainty amplify the spillage of risk from the real estate market into the banking and insurance sectors. Surprisingly, its effect on spillage from real estate to the securities sector is not significantly impacted by such uncertainty. Additionally, the influence of monetary policy uncertainty on risk spillage varies across different periods. For instance, from the 2008 financial crisis to the Eurozone crisis, the impact of uncertainty-induced risk spillage consistently increases. Lastly, variance decomposition analysis highlights that monetary policy uncertainty significantly explains variations in risk spillage from the real estate market into the banking and insurance sectors.
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