Sectoral risk contagion and quantile network connectedness on Chinese stock sectors after the COVID-19 outbreak

Yang Gao, Wanqi Zheng and Yaojun Wang

China Finance Review International, 2023, vol. 15, issue 1, 202-238

Abstract: Purpose - This study aims to explore the risk spillover effects among different sectors of the Chinese stock market after the outbreak of COVID-19 from both Internet sentiment and price fluctuations. Design/methodology/approach - The authors develop four indicators used for risk contagion analysis, including Internet investors and news sentiments constructed by the FinBERT model, together with realized and jump volatilities yielded by high-frequency data. The authors also apply the time-varying parameter vector autoregressive (TVP-VAR) model-based and the tail-based connectedness framework to investigate the interdependence of tail risk during catastrophic events. Findings - The empirical analysis provides meaningful results related to the COVID-19 pandemic, stock market conditions and tail behavior. The results show that after the outbreak of COVID-19, the connectivity between risk spillovers in China's stock market has grown, indicating the increased instability of the connected system and enhanced connectivity in the tail. The changes in network structure during COVID-19 pandemic are not only reflected by the increased spillover connectivity but also by the closer relationships between some industries. The authors also found that major public events could significantly impact total connectedness. In addition, spillovers and network structures vary with market conditions and tend to exhibit a highly connected network structure during extreme market status. Originality/value - The results confirm the connectivity between sentiments and volatilities spillovers in China's stock market, especially in the tails. The conclusion further expands the practical application and theoretical framework of behavioral finance and also lays a theoretical basis for investors to focus on the practical application of volatility prediction and risk management across stock sectors.

Keywords: Industry sectors; Investor sentiment; Quantile network; Risk contagion (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:cfripp:cfri-02-2023-0039

DOI: 10.1108/CFRI-02-2023-0039

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