Spillovers from the Slowdown in China on Financial and Energy Markets: An Application of VAR–VECH–TARCH Models

• Main Authors: Caner Özdurak, Veysel Ulusoy
• Format: Article
• Language: English
• Published: MDPI AG 2020-08-01
• Series: International Journal of Financial Studies
• Subjects: spillover; contagion; Chinese stock markets; VAR; VECH; TARCH
• Online Access: https://www.mdpi.com/2227-7072/8/3/52

The 2008 global financial crisis provides us with a wide range of study fields on cross-asset contagion mechanisms in the US financial markets. After a decade of the so-called subprime crisis, the impact of market news on asset volatilities increased significantly. Consequently, return and volatility spillovers became the most extensive channel for spreading out the news generated in one market to the other ones, which made the financial markets inherit international risk factors as their own local risks. Moreover, as a result of the Chinese economy becoming the main driver of the global economy in the last decade, Chinese markets became more interconnected with developed markets which were followed by a “digital cold war” era via Twitter. In this study, we investigate the relationship between the US stock market, Chinese stock markets, rare earth markets and industrial metals, and mining products via three different models by utilizing VAR–VECH–TARCH models. According to our findings, bilateral spillover exists between US and Chinese stock markets. Cross-market spillovers show that there is a risk transmission channel between the industrial metals, rare earth, and Chinese and US stock markets due to China’s strengthening position in the global economy.