Quantum mechanics

Interbank lending market

Engineering

Stock (firearms)

Biology

Statistics

Transfer entropy

Financial market

Interest rate

Stock market

Entropy (arrow of time)

Financial contagion

Economics

Business

Paleontology

Mechanical engineering

Principle of maximum entropy

Physics

Mathematics

Monetary economics

Econometrics

Horse

Financial economics

Finance

Entropy

What is the impact of a bank failure on the whole banking industry? To resolve this issue, the paper develops a transfer entropy-based method to determine the interbank exposure matrix between banks. This method constructs the interbank market structure by calculating the transfer entropy matrix using bank stock price sequences. This paper also evaluates the stability of Chinese banking system by simulating the risk contagion process. This paper contributes to the literature on interbank contagion mainly in two ways: it establishes a convincing connection between interbank market and transfer entropy, and exploits the market information (stock price) rather than presumptions to determine the interbank exposure matrix. Second, the empirical analysis provides an in depth understanding of the stability of the current Chinese banking system.

Risk Contagion in Chinese Banking Industry: A Transfer Entropy-Based Analysis