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Does foreign equity investment impact the spillover effect of industries in China?

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  • Xu, Hao
  • Li, Songsong
  • Tian, Zhihong

Abstract

This study aims to systematically investigate the impact of foreign equity investment on the spillover across industries in China, both in terms of the contagion path and persistence of shocks and the performance during the COVID-19 pandemic. We use daily data on returns covering 2014 to 2022 and apply linear and non-linear causality tests and spillover framework. Our findings show that the two proxies of foreign investment, net buying and Δ Net Buying, significantly shock the spillover across 11 industry indexes of China’s stock market, particularly the spillover output and long-term spillover received of sectors. During the COVID-19 pandemic, international investors are bullish on China’s economy reflected in the continuous inflow of northbound trading, and the short-run influence on China’s stock market is weakened, while the long-run impact remains. Moreover, financial networks suggest that the path of movement international capital movement to accomplish overall contagion through shock in certain specific industries. Overall, this study evidence that the northbound trading generally overlooked by researchers is indeed an important channel of financial contagion to China’s stock market.

Suggested Citation

  • Xu, Hao & Li, Songsong & Tian, Zhihong, 2023. "Does foreign equity investment impact the spillover effect of industries in China?," The North American Journal of Economics and Finance, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:ecofin:v:68:y:2023:i:c:s1062940823000785
    DOI: 10.1016/j.najef.2023.101955
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    Cited by:

    1. Jun Long & Xianghui Yuan & Liwei Jin & Chencheng Zhao, 2024. "Connectedness and risk spillover in China's commodity futures sectors," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(5), pages 784-802, May.
    2. Aboagye, Ernest & Ko, Stanley Iat-Meng & Lo, Chia Chun & Hsiao, Cody Yu-Ling & Peng, Liang, 2024. "A contagion test with unspecified heteroscedastic errors," Journal of Economic Dynamics and Control, Elsevier, vol. 159(C).

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