Shadow banking interconnectedness in South Africa: Toda and Yamamoto (T-Y) Granger causality test

Purpose Financial linkages are an important determinant of shock transmissions, and the risk of financial system instability is higher when financial institutions are closely connected. This paper aims to examine interconnectedness within the shadow banking system, a credit intermediation outside traditional banking, in South Africa. Design/methodology/approach The authors used the conditional value-at-risk (Co-VaR), using market returns of fixed-income funds, funds-of-funds, money market funds and multi-asset funds from January 2015 to December 2021, to identify funds with the highest contribution to systemic risk. The authors examined interconnectedness using the Toda and Yamamoto Granger causality test among the funds with the highest contribution to systemic risk. Findings The authors find a greater degree of interconnectedness in the shadow banking sector, and linkages are at an all-time high during COVID-19. The results also show that while money market funds are only receivers, multi-asset funds are both transmitters and receivers of systemic risk. Practical implications The regulator should strengthen monitoring of the linkages in shadow banking, particularly among multi-asset funds and money market funds, and during periods of financial turmoil. Originality/value The study contributes to the growing literature on systemic risk in shadow banking. Compared to prior literature, the authors use market returns data from an emerging African economy, South Africa.