Linkages and Spillovers between Internet Finance and Traditional Finance: Evidence from China

ABSTRACT

Investors, researchers, and policy makers have an urgent need to understand the linkages between internet finance and traditional financial markets. This study collects corresponding daily industrial indices of the banking, security, and insurance industries from the Wind database to depict the traditional financial market in China and uses an online loan comprehensive interest rate index as a proxy for internet finance. The empirical results first show that only internet finance and the banking industry have mutual causality. Then, using conditional value at risk (CoVaR) to measure the degree of spillovers, the risk of internet finance is more likely to spill over to the banking industry, followed by the insurance industry and, lastly, the securities industry. These findings are consistent with the closeness between internet finance and the banking, insurance, and security industries, respectively. The linkage relationships and spillover effect are robust to the method and market index applied.

KEY WORDS:

• CoVaR
• internet finance
• linkages
• spillovers
• traditional finance

Notes

1. The terms “fintech,” “online finance,” “electronic finance,” “virtual finance,” and “cyber finance” are also used.

2. Policy discussion of internet finance in China (BOFIT Policy Brief. Institute for Economies in Transition, Bank of Finland): available at https://helda.helsinki.fi/bof/handle/123456789/13462.

3. According to the currency rate on April 19th (1 USD = 6.7037 RMB), the volume of internet financial products in China in 2016 and 2017 reached USD 0.2983 trillion and USD 0.4177 trillion respectively.

4. The SW Bank Index is weighted average by the stock prices of 16 listed banks.

5. The SW Securities Index and the SW Insurance Index are weighted average of the stock prices of 25 listed securities companies and 5 listed insurance companies, respectively.

6. The online loan comprehensive interest rate index is commonly used as a proxy for the development of internet finance in China (e.g., Wei and Wei 2018; Yang and Yang 2018). Moreover, according to the data from Netloan Home (www.wdzj.com), by the end of May 2018, the cumulative transaction volume of the P2P online lending industry was RMB 715.464 billion, which accounts for a large proportion of internet finance.

7. Due to the limit of space, the detailed results of the fitting tests are not illustrated. They can be offered upon request.

Additional information

Funding

This work is partially supported by grants from the Key program of the National Natural Science Foundation of China (NSFC No. 71631005), and National Natural Science Foundation of China (NSFC No. 71471161).