What influences the dynamic spillovers of China’s financial market uncertainties?

ABSTRACT

Uncertainty serves as a significant source of volatility in financial markets. The aim of this study is to examine the spillover effects of China’s financial market uncertainties (capital market, currency market, foreign exchange (FX) market and derivatives market) and their potential determinants. A large amount of economic and financial data is selected as the sample dataset to construct the financial uncertainty index by the combination of the stochastic volatility model and the Markov chain Monte Carlo algorithm. The TVP-VAR-DY model and the extreme bounds analysis model are also used to conduct spillover and determinant analyses. The results indicate that uncertainties in capital and currency markets primarily act as transmitters of spillover effects. The derivatives market uncertainty mainly serves as a recipient of influence from other markets, whereas the role of FX market uncertainty is relatively unstable. Moreover, international factors such as global economic policy uncertainty and the implied volatility index (VIX) have a more robust impact on spillover relationships among the four financial uncertainties, whereas domestic factors have the greater impact intensity.

KEYWORDS:

• Uncertainty
• financial market
• spillover
• extreme bounds analysis

JEL CLASSIFICATION:

• C58
• G15

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ We also allow different forecast horizon steps from 6 to 15 and decay/forgetting factors from 0.96 to 0.99 as sensitivity analyses to validate the effectiveness of our spillover results. The results show that these spillover indices have a consistent trend and close values. For brevity, we have not placed the results in the body, but the details can be provided upon request.

Additional information

Funding

This work was supported by the China Postdoctoral Science Foundation.