Analysis of stock markets risk spillover with copula models under the background of Chinese financial opening

Jiangze Du, Xizhuo Chen, Jincheng Gong, Xiao Lin and Kin Keung Lai

International Journal of Finance & Economics, 2023, vol. 28, issue 4, 3997-4019

Abstract: This article adopts the new point of view on dynamic time‐varying based research, combined with the Copula and CoVaR model, to analyse the risk spillover effect of mainland China, Hong Kong and the US stock markets as well as the multi‐dimensional formation mechanism from the perspective of macroeconomic variables (VXFXI, EER, EPU and Liquidity) using TVP‐VAR‐SV and impulse response model. First, we find that the constructed copula models can address the asymmetry of stock market systemic risk spillover and the characteristics of co‐movement with better tail dependence estimation. Second, there is an obvious risk spillover effect between the Shanghai Composite Index (SSEC) and Shenzhen Component Index (SZEC). Due to the development of two connect programs, systemic risk can spread quickly from the Hang Seng Index (HSI) to SSEC and SZEC. Third, since the structure and participants of Chinese stock market, all macroeconomic variables make strongly positive and significant nonlinear impact on ΔCoVaR and exhibit significant non‐symmetric characteristics in the long‐ and short‐term perspectives, especially for EPU. These results indicate that strengthening the interconnections among systemically global stock markets is of important practical significance. Also, regulators should pay more attention on the policy uncertainty between economic and financial policy released time and lag 4‐month period.

Date: 2023
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