The Cross-Shareholding Network and Risk Contagion from Stochastic Shocks: An Investigation Based on China’s Market

This investigation performs a detailed analysis of how the cross-shareholding network enhances stock market comovement and leads to the rise of the risk contagion effect. We construct a model with random shocks to describe the interdependence of stock prices in the cross-shareholding network and how the risk contagion effect occurs. The simulation results show that market volatility is not sensitive to changes in the shareholding ratio. Furthermore, both the simulation results and their empirical verification show that volatility is particularly sensitive to changes in the reciprocity and density of the network. Firms with high centrality contribute more to strengthening stock price comovement than firms with low centrality. Unlike the contagion of risks such as bank failures among interbank credit networks, we find that cross-shareholding networks magnify and spread small but continuous external shocks. The results of this paper highlight the importance of the network structure, which helps to provide a quantitative and accurate policy basis for the prevention and control of risk contagion caused by cross-shareholdings.