Abstract
As global financial markets become highly dependent on each other, risk contagion among stock markets is a primary feature of progressing globalization, which poses uncertainties for government agencies. The deficiency of previous studies is that it is difficult to accurately grasp the direction of risk diffusion in different time periods, and to depict the intensity of risk contagion constantly. Research on causality and measurement of financial risk contagion based on nonlinear causality tests and dynamic Copula methods will help governments to allocate financial resources reasonably and effectively, thus promoting the sustainable development of the social economy and financial markets. Taking the Chinese stock market as an example, this paper evaluated the risk contagion effect between the Chinese stock market and six other stock markets including developed and emerging markets from January 2006 to December 2018. From the aspect of causality, the nonlinear Granger causality test was applied to the entire time period and the phased time periods involving specific events like the subprime mortgage crisis and the Chinese stock market crash. From the aspect of measurement, the dynamic Markov state transition Copula model was used to describe the asymmetrically dependent structure of markets, from which was derived the time-varying lower tail dependence coefficients. The results have been summarized as follows. Firstly, after the outbreak of the subprime mortgage crisis, the stock markets in developed and emerging markets unilaterally affected the Chinese stock market, indicating that China was the recipient at this stage. Then, after the outbreak of the Chinese stock market crash, the Chinese stock market had a risk contagion effect on both Japanese and Russian stock markets, indicating that China became a source of financial risk contagion within a limited area at this stage. Lastly, in terms of the degree of risk contagion, the lower tail dependence coefficients of the Chinese stock market and other markets were significantly increased after the occurrence of specific risk events, while the risk contagion degree of developed markets was higher than that of emerging markets. Policymakers can recognize and apply the characteristics of risk contagion at different stages to refrain from unreasonable institutional arrangements, thus improving the sustainability of economic development.
Highlights
With global economic ties becoming increasingly closer, financial capital can flow rapidly among countries, which makes the segmentation of modern international stock markets less pronounced, resulting in markets that are highly dependent on each other
Risk contagion means that foreign shocks will be transmitted to the local market, which increases the risks of the financial market and even the whole economic operation, including liquidity risk, corporate bankruptcy, trade surplus slowdown, economic downturn, rising unemployment rate, social unrest and so on, which poses challenges to the local governments [5,6,7]
With the perfection of the theoretical research system benefiting from many previous studies, empirical analysis on financial risk contagion in the stock market has resulted in several useful findings
Summary
With global economic ties becoming increasingly closer, financial capital can flow rapidly among countries, which makes the segmentation of modern international stock markets less pronounced, resulting in markets that are highly dependent on each other. We used the nonlinear Granger causality test to study the risk contagion effects between the Chinese stock market and developed and emerging markets from the perspectives of the causality of risk contagion. Through summarizing the previous literature, the research methods on causality and measurement of financial market risk contagion can be roughly divided into the following categories. With the perfection of the theoretical research system benefiting from many previous studies, empirical analysis on financial risk contagion in the stock market has resulted in several useful findings. We divide the research period into three aspects: before and during the subprime mortgage crisis, before and during the stock market disaster in China in 2015, and the risk contagion performance in the whole period of time. Based on the above improvements, this paper hopes to obtain more detailed and accurate conclusions than before, so as to contribute to the previous research results
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