Identification of the contagion effect in China's financial market uncertainties: A multiscale and dynamic perspective

Abstract

Uncertainty is a crucial source of financial market volatility. Unlike previous research considering uncertainty from holistic and static viewpoints, we investigate the contagion effect of financial market uncertainties from a combined time-frequency and dynamic perspective. In a data-rich environment, we construct various uncertainty indices for China's financial market based on forecast errors and examine their contagion effect using a combined wavelet transform and network analysis. We also simulate dynamic contagion patterns under three different extreme scenarios, including a short-term liquidity crisis, a medium-term stock market crash and long-term central bank monetary policy shocks. The results indicate that the short-term fluctuations in China's financial market uncertainty exhibit a greater contagion intensity but with limited range. However, long-term uncertainty shocks exhibit a broader scope, but their impact intensity is significantly mitigated. Moreover, the liquidity crisis does not present a wide impact at the early stage, whereas the contagion pattern of the stock market crash shows explosive characteristics.