Contagion Effect of Financial Markets in Crisis: An Analysis Based on the DCC–MGARCH Model

Xiuping Ji, Sujuan Wang, Honggen Xiao, Naipeng Bu and Xiaonan Lin
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Xiuping Ji: Business School, University of Sussex, Brighton BN1 9RH, UK
Sujuan Wang: Business School, Shandong University, Weihai 264209, China
Honggen Xiao: School of Hotel and Tourism Management, The Hong Kong Polytechnic University, Hong Kong 999077, China
Naipeng Bu: Business School, Shandong University, Weihai 264209, China
Xiaonan Lin: Business School, Shandong University, Weihai 264209, China

Mathematics, 2022, vol. 10, issue 11, 1-14

Abstract: Global crises have created unprecedented challenges for communities and economies across the world, triggering turmoil in global finance and economy. This study adopts the dynamic conditional correlation multiple generalized autoregressive conditional heteroskedasticity (DCC–MGARCH) model to explore contagion effects across financial markets in crisis. The main findings are as follows: (1) the financial crisis and COVID-19 pandemic intensified the connection between the Chinese and US stock markets in the short term; (2) the dynamic conditional correlations (DCCs) during the COVID-19 pandemic are higher than those during the 2008 financial crisis owing to the further opening of the Chinese capital market, and financial institutions’ investments in the European market are higher than those in the American markets; (3) a stepwise increase is observed in the dynamic conditional correlation between the returns on the S&P 500 Index and SSEC during and after the onset of a destructive crisis; and (4) a unidirectional contagion effect exists between the Chinese market and US market, and the Hong Kong stock market contributes to the risk spillover. Effective transmission channels of external negative shocks may be investors’ sentiments, financial institutions, and the RMB exchange rate in the stock markets. This study provides useful suggestions to authorities formulating financial regulations and investors diversifying risk investments.

Keywords: global turmoil; DCC–MGARCH model; correlation; Granger causality test (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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