Financial spillovers and spillbacks: New evidence from China and G7 countries

• Published in: Economic modelling 2021-01, Vol.94, p.184-200
• Main Authors: Fang, Yi, Jing, Zhongbo, Shi, Yukun, Zhao, Yang
• Format: Article
• Language: English
• Subjects: Emerging markets; Financial spillbacks; Financial spillovers; Transmission channels; VAR model
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2020.09.022

With the increasing openness of the Chinese economy, Chinese financial markets are becoming more integrated with those in developed markets. The goal of this paper is to comprehensively investigate the spillovers and spillbacks in stock, bond, and foreign exchange markets between China and the G7 countries using data from 2000 to 2018. Four important findings emerge: (1) financial spillovers account for a large proportion of the variations in bond, stock, and foreign exchange markets, indicating that the international spillover effect has become an important driver of asset prices; (2) Chinese financial markets have a growing impact on global financial markets over time, especially during periods of turbulence; (3) spillovers from the G7 to China are still higher than the spillbacks from China, suggesting that Chinese markets are more influenced by the financial markets in the G7 economies than the other way around; (4) economic policy uncertainty is the main driver of cross-border financial spillovers. Our findings have important implications for policy makers who aim to promote international macroprudential policy coordination. •We investigate financial spillovers and spillbacks between China and the G7 economies.•We identify the transmission channels of financial spillovers and spillbacks.•Financial spillovers account for a large proportion of variation in asset prices.•Chinese financial markets have a growing impact on global financial markets over time.•Economic policy uncertainty is the main driver of cross-border financial spillovers.