Spillovers and dynamic connectedness during the Covid-19 pandemic : evidence from China

Abstract

The outbreak of COVID-19 triggered dramatic volatility in the global and Chinese financial markets, with far-reaching impacts on the world economy and stock markets. Based on the theoretical framework of Diebold & Yilmaz (2009, 2012), this study analyzes the dynamic spillover effects between the Chinese stock market and the global market. The results of the study show that the connectivity of developed markets such as Germany, the United Kingdom, and the United States increased significantly during the epidemic, similar to the pattern in the economic crisis. This study finds that the volatility index (VIX) is an important indicator of spillover effects, highlighting the importance of global risk factors before, during and after the epidemic. Although the case rate is usually an important indicator of financial stability, the relevant evidence is weaker in China than in other countries. This may be because China's effective outbreak control measures mitigate the impact of rising case rates on market instability. In addition, vaccination rates are significant in the country-level analysis, and rapid vaccination progress can significantly reduce spillover effects and enhance financial stability early in an epidemic. It is noteworthy that the pattern of spillovers in China is different from that of other countries, and the impact of COVID-19 on financial market spillovers is relatively weak. Although we find significant effects in some cases, these effects are only effective in specific circumstances. This reflects China's strong epidemic response and economic policies, which effectively buffered the impact of global shocks on China's financial markets. In short, this study reveals the complex relationship between global risk factors, public health indicators, and financial market stability, and emphasizes the importance of considering both global and national level factors when assessing financial vulnerability and formulating policies. Policymakers should learn from the experiences of different regions and develop strategies to mitigate spillover risks and enhance economic resilience.