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

摘要

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.