Volatility Spillovers and Risk Contagion Paths with Capital Flows across Multiple Financial Markets in China

Xuejin Zhao, Wei-Guo Zhang and Yong-Jun Liu

Emerging Markets Finance and Trade, 2020, vol. 56, issue 4, 731-749

Abstract: This article investigates the issues of volatility spillovers and risk contagion paths with capital flows across the foreign exchange, monetary, credit, and stock markets in a country. We derive the theoretical price linkage of financial markets based on traditional theories of the Gordon model and interest rate parity theory. Then, we set up a volatility spillover model of financial markets and show the cross-market volatility spillover effects by using China’s historical data from January 1996 to December 2016. Regarding the asymmetric spillovers, we determine that they are related to cross-market capital flow routes. After empirical analysis on the unnatural capital flows’ contribution to financial risk contagion, three cross-market risk transmission paths are identified based on the capital flows, which originate from the exchange rate risk, credit risk, and stock volatility risk, respectively.

Date: 2020
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DOI: 10.1080/1540496X.2018.1472080

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