Does Endogenous Inter-Firm Spillover Amplify Industry-Wide Risk? Evidence from China’s New Energy Sector

This study examines whether endogenous inter-firm volatility spillovers amplify industry risk in China’s new energy sector. It constructs a leave-one-out industry index under a market–industry two-factor framework, extracts residual stock returns, and estimates firm-level residual conditional volatility. Based on these volatility series, the LASSO-VAR connectedness approach is employed to identify the direction, magnitude, and structure of firm-specific volatility spillovers across firms. Total spillovers, total within-group spillovers, and total between-group spillovers are then separately introduced into a GARCH-X model to test whether inter-firm risk transmission net of common factor exposures is associated with elevated industry conditional volatility. The results show that, even after removing market-wide and industry-wide common factors, firm-level residual volatilities remain widely and significantly interconnected. These spillovers exhibit clear time-varying characteristics and become markedly stronger around 2024. The GARCH-X results further indicate that all three spillover measures are positively and significantly associated with industry volatility, and that the amplifying effect of within-group spillovers is at least as strong as that of between-group spillovers. The findings suggest that industry risk is driven not only by external shocks, but also by amplification mechanisms operating within the inter-firm network that are not captured by common factor models alone.