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

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  • Xuejin Zhao
  • Wei-Guo Zhang
  • Yong-Jun Liu

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.

Suggested Citation

  • Xuejin Zhao & Wei-Guo Zhang & Yong-Jun Liu, 2020. "Volatility Spillovers and Risk Contagion Paths with Capital Flows across Multiple Financial Markets in China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 56(4), pages 731-749, March.
    • Handle: RePEc:mes:emfitr:v:56:y:2020:i:4:p:731-749
    DOI: 10.1080/1540496X.2018.1472080
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    Cited by:

    1. Xu, Hao & Li, Songsong, 2023. "What impacts foreign capital flows to China's stock markets? Evidence from financial risk spillover networks," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 559-577.
    2. Deepika Krishnan & Vishal Dagar, 2022. "Exchange Rate and Stock Markets During Trade Conflicts in the USA, China, and India," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 14(2), pages 185-203, May.
    3. Yip, Pick Schen & Brooks, Robert & Do, Hung Xuan & Vo, Xuan Vinh, 2022. "What drives cross-market correlations during the United States Q.E.?," International Review of Financial Analysis, Elsevier, vol. 83(C).

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