Can local government implicit debt raise regional financial market spillover? Evidence from China.

• We adopt the volatility spillover network and block models to identify the aggregation characteristics among provinces. • There is a significantly positive relationship between local government implicit debt and regional financial market spillover. • Local government implicit debt influences regional financial market spillover through two potential channels: credit expansion and the financial situation. This paper investigates how local government implicit debt influences regional financial market spillovers. Utilizing the volatility spillover network of Diebold and Yilmaz (2014) , we demonstrate that financial distress stemming from implicit debt can trigger regional financial market spillovers. Further analysis reveals that credit expansion amplifies the impact of local government implicit debt on cross-province volatility spillovers, while an improved financial situation lessens this impact. Moreover, this effect is more prominent in provinces with a higher foreign trade dependency and greater industrial structural change. [ABSTRACT FROM AUTHOR]