How does tail risk spill over between Chinese and the US stock markets? An empirical study based on multilayer network

Yingbo Ouyang, Chi Xie, Kelong Li, Tingcheng Mo and Yusen Feng

International Review of Financial Analysis, 2024, vol. 95, issue PC

Abstract: Given the significant political and economic frictions between China and the US, which bring high uncertainty to the global economy, it is crucial to understand how these tensions led to tail risk events and potentially destabilize the stock markets. We construct a multilayer network to examine tail risk spillovers between the stock markets of the two countries and find that (i) the value of total connectedness, an index measuring the overall spillover, rises amidst the tensions and declines during reconciliations; (ii) compared to the intralayer effects, the interlayer tail risk spillovers mostly generate in a form of extreme points rather than steady overflows, which implies that interlayer transmissions occur irregularly, i.e., a sudden surges in distressed sectors; and (iii) in terms of sector, the out-strengths are more concentrated in contrast with the in-strengths, which suggests that some sectors may play the role of major transmitters in the interlayer tail risk spillovers. To summarize, we quantify tail risk spillovers via the multilayer networks, which provides evidence on how tail risk spillovers materialize between the Chinese and the US stock markets during different stages of bilateral relations.

Keywords: Chinese stock market; US stock market; Tail risk spillovers; Multilayer network; TENET (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:95:y:2024:i:pc:s1057521924004472

DOI: 10.1016/j.irfa.2024.103515

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