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Identification of the contagion effect in China's financial market uncertainties: A multiscale and dynamic perspective

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  • Wang, Xinya
  • Xu, Xin
  • Rong, Xueyun
  • Xuan, Siyuan

Abstract

Uncertainty is a crucial source of financial market volatility. Unlike previous research considering uncertainty from holistic and static viewpoints, we investigate the contagion effect of financial market uncertainties from a combined time-frequency and dynamic perspective. In a data-rich environment, we construct various uncertainty indices for China's financial market based on forecast errors and examine their contagion effect using a combined wavelet transform and network analysis. We also simulate dynamic contagion patterns under three different extreme scenarios, including a short-term liquidity crisis, a medium-term stock market crash and long-term central bank monetary policy shocks. The results indicate that the short-term fluctuations in China's financial market uncertainty exhibit a greater contagion intensity but with limited range. However, long-term uncertainty shocks exhibit a broader scope, but their impact intensity is significantly mitigated. Moreover, the liquidity crisis does not present a wide impact at the early stage, whereas the contagion pattern of the stock market crash shows explosive characteristics.

Suggested Citation

  • Wang, Xinya & Xu, Xin & Rong, Xueyun & Xuan, Siyuan, 2024. "Identification of the contagion effect in China's financial market uncertainties: A multiscale and dynamic perspective," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 1340-1362.
    • Handle: RePEc:eee:reveco:v:93:y:2024:i:pa:p:1340-1362
    DOI: 10.1016/j.iref.2024.03.074
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