The study of co-movement risk in the context of the Belt and Road Initiative

Abstract

This study examines the potential risks of the Belt and Road Initiative (BRI) on the comovements of international stock markets. Using stock markets of related countries as a case study, we implement an asymmetric dynamic conditional correlation model to estimate dynamic conditional correlations between the China stock market and related stock markets. The results of testing the structural changes show that the breakpoints of dynamic conditional correlations are within the announcement dates of BRI, documenting that the comovements between China's stock market and related stock markets significantly increase following BRI actions. The positive comovements lead to a stronger volatility spillover effect when China's stock market is more volatile. To investigate the downside risk of BRI actions, we evaluate the performance of portfolio strategies by introducing gold. The findings show that portfolios composed of gold and stock markets perform well. These results suggest that using gold as a hedge could effectively increase the diversification benefits and reduce downside risk.