What influences the dynamic spillovers of China’s financial market uncertainties?

Abstract

ABSTRACT Uncertainty serves as a significant source of volatility in financial markets. The aim of this study is to examine the spillover effects of China’s financial market uncertainties (capital market, currency market, foreign exchange (FX) market and derivatives market) and their potential determinants. A large amount of economic and financial data is selected as the sample dataset to construct the financial uncertainty index by the combination of the stochastic volatility model and the Markov chain Monte Carlo algorithm. The TVP-VAR-DY model and the extreme bounds analysis model are also used to conduct spillover and determinant analyses. The results indicate that uncertainties in capital and currency markets primarily act as transmitters of spillover effects. The derivatives market uncertainty mainly serves as a recipient of influence from other markets, whereas the role of FX market uncertainty is relatively unstable. Moreover, international factors such as global economic policy uncertainty and the implied volatility index (VIX) have a more robust impact on spillover relationships among the four financial uncertainties, whereas domestic factors have the greater impact intensity.