Identification of the contagion effect in China's financial market uncertainties: A multiscale and dynamic perspective

Xinya Wang, Xin Xu, Xueyun Rong and Siyuan Xuan

International Review of Economics & Finance, 2024, vol. 93, issue PA, 1340-1362

Abstract: Uncertainty is a crucial source of financial market volatility. Unlike previous research considering uncertainty from holistic and static viewpoints, we investigate the contagion effect of financial market uncertainties from a combined time-frequency and dynamic perspective. In a data-rich environment, we construct various uncertainty indices for China's financial market based on forecast errors and examine their contagion effect using a combined wavelet transform and network analysis. We also simulate dynamic contagion patterns under three different extreme scenarios, including a short-term liquidity crisis, a medium-term stock market crash and long-term central bank monetary policy shocks. The results indicate that the short-term fluctuations in China's financial market uncertainty exhibit a greater contagion intensity but with limited range. However, long-term uncertainty shocks exhibit a broader scope, but their impact intensity is significantly mitigated. Moreover, the liquidity crisis does not present a wide impact at the early stage, whereas the contagion pattern of the stock market crash shows explosive characteristics.

Keywords: Financial uncertainty; Contagion; Multiscale; Network (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:93:y:2024:i:pa:p:1340-1362

DOI: 10.1016/j.iref.2024.03.074

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