Study on the Risk Contagion Effect between Chinese and American Financial Markets Based on BEKK-GARCH Model

Abstract

With the significant increase of uncertainties facing the global economy, systemic risks in China and international financial markets occur frequently, seriously restricting the stable development of financial markets and the smooth operation of the economy. In the context of economic globalization and the integration of market economy, the increased correlation between markets leads to the enhancement of risk resonance effect, which leads to the contagion of risks among different markets, among which China is particularly affected by the fluctuation effect of American market risks. In view of this, this paper uses the BEKK-GARCH (1,1) model to explore the risk contagion effect between China and the United States during the period of January 2, 2001 solstice and March 19, 2021. The results show that, first, in the full sample interval, there is a two-way volatility spillover effect between the Chinese market and the American market and there is a Granger causality. The degree of volatility spillover from American to China is more significant. Second, in the four crisis intervals, the volatility spillover effects of China and the US show some characteristics different from those of the full sample interval. During the European debt crisis, there was a positive volatility spillover effect between the two markets, and the spillover degree of systemic risks in China’s market to the US market was more significant. During COVID-19, the US market risks had negative volatility spillover to the Chinese market. Third, both the Chinese and American markets are affected by their own fluctuations in the early stage with relatively large impacts and short duration, while the impact of the US on China lasts for about 7 periods.