Double Asymmetric Impacts, Dynamic Correlations, and Risk Management Amidst Market Risks: A Comparative Study between the US and China

Poshan Yu (), Haoran Xu and Jianing Chen
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Poshan Yu: Business School, Soochow University, Suzhou 215006, China
Haoran Xu: Independent Researcher, Suzhou 215006, China
Jianing Chen: Independent Researcher, Suzhou 215006, China

JRFM, 2024, vol. 17, issue 3, 1-28

Abstract: Extreme shocks, including climate change, economic sanctions, geopolitical conflicts, etc., are significant and complex issues currently confronting the global world. From the US–China perspective, this paper employs the DCC-DAGM model to investigate how diverse market risks asymmetrically affect return volatility, and extract correlations between stock indices and hedging assets. Then, diversified and hedging portfolios, constructed by optimal weight and hedge ratio, are investigated using multiple risk reduction measures. The empirical results highlight that, first, diverse risks exhibit an asymmetric effect on the return volatility in the long term, while in the short term, the US stock market is more sensitive to negative return shocks than the Chinese market. Second, risks impact correlations differently across time horizons and countries. Short-term correlations are stronger than long-term ones for the US market, with the Chinese stock market displaying more stable correlations. Third, the hedging strategy is more effective in reducing volatility and risk for US stocks, while the diversification strategy proves more effective for Chinese stocks. These findings have implications for market participants striving to make their portfolios robust during turbulent times.

Keywords: hedging asset; risk and uncertainty; emerging market; risk management strategy; double asymmetric GARCH-MIDAS (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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