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The Risk Contagion between Chinese and Mature Stock Markets: Evidence from a Markov-Switching Mixed-Clayton Copula
Hongli Niu1, Kunliang Xu1, Mengyuan Xiong2
1School of Economics and Management, University of Science and Technology Beijing, Beijing 100083, China.
Entropy (Basel, Switzerland)
|May 16, 2023
Summary
This study reveals asymmetric risk dependence between Chinese and mature stock markets. Mature markets primarily transmit risk to China, with stronger downside effects, impacting investment strategies.
Area of Science:
- Financial Economics
- Quantitative Finance
- Econometrics
Background:
- Understanding risk spillover between emerging and mature stock markets is crucial for global financial stability.
- Existing models may not fully capture the dynamic and asymmetric nature of risk dependence.
Purpose of the Study:
- To investigate the dynamic risk dependence and contagion effects between the Chinese stock market and mature stock markets.
- To develop and apply a novel Markov-switching mixed-Clayton copula model for this analysis.
- To provide actionable insights for investors and risk managers regarding cross-market risk.
Main Methods:
- Development of a Markov-switching mixed-Clayton (Ms-M-Clayton) copula model.
- Application of the model to analyze dynamic risk dependence between China and mature markets (Americas, Europe, Asia-Oceania).
- Utilizing Conditional Value at Risk (CoVaR) to quantify risk spillovers.
Main Results:
- Empirical evidence of a time-varying yet stable positive risk dependence structure.
- Asymmetric correlations between upside and downside risks.
- Predominant risk contagion from mature markets to China, with a stronger downside effect.
- Weaker risk contagion from Asia-Oceania compared to Europe and the Americas.
Conclusions:
- The Chinese stock market exhibits significant, asymmetric risk dependence with mature markets.
- Risk contagion flows predominantly from mature economies to China, particularly during downturns.
- Geographical origin of risk contagion to China varies in intensity, with Europe and the Americas posing greater influence than Asia-Oceania.
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