Time and frequency spillovers between political risk and the stock returns of China's rare earths

Abstract

This study explores the time and frequency spillover relationship between the political risk (PR) of major importers and exporters and the stock returns of China's rare earths (RER) by using the spillover index proposed by Diebold and Yilmaz (2012, 2014) (D&Y (2012, 2014)) and Baruník and Křehlík (2018) (B&K (2018)). The research results indicate that the average total spillovers between PR and RER are 35.55%, in which short-term spillovers play a dominant role with the average proportion of 71.21%. In particular, the spillover index increases significantly during major financial and political events, including the global financial crisis, European debt crisis, China-Japan diplomatic event, the crisis between Russia and Ukraine, the announcement of WTO dispute resolution about rare earths (REs) and the US presidential election. In addition, Myanmar has the largest PR index, which is also the biggest contributor in the spillover network regardless of time periods. In terms of RER, it is a net receiver of spillovers from PR, which obtains more spillovers from importing countries than exporting countries. Generally, Japan, Estonia, Myanmar and the Netherlands are the top spillover emitters to RER while Germany, France, Japan and India are the main spillover receivers from RER. Moreover, Japan emits evidently more spillovers to RER in the long term and during major political event.