The interdependence and risk transmission between southward, northward capital and China’s stock, foreign exchange market

Abstract

This paper mainly studies the interdependence structure and risk transmission between China’s north–south capital flow and the stock market and foreign exchange market. The results show that the correlation between southward capital and the mainland stock market is stronger, and the correlation between northward capital and the Hong Kong stock market is stronger. The correlation between northward capital and RMB exchange rate is greater than that between southward capital and RMB exchange rate. After the outbreak of COVID-19, the correlation between capital flows and the stock market has strengthened, while the correlation with the foreign exchange market has weakened. Furthermore, there is a bidirectional risk transmission between the north–south capital flow and China’s stock market and foreign exchange market. In general, the north–south capital flow has a greater impact on the stock market, and the exchange rate of RMB/US dollar has a greater impact on the north–south capital flow. This study has implications for investors and policymakers.