Return Spillover and its Determinants in China's Financial Markets

Abstract

This paper examines return spillover across China’s bond, stock, and Renminbi offshore (CNH/USD) and onshore (CNY/USD) markets. We find evidence that the major transmitting role of the exchange rate market to other markets originates from the CNH/USD market. Our result suggests that the less regulated CNH/USD market can reflect more market information and transmit it to bond and stock markets. Moreover, macroeconomic factors such as the monetary policy and economic policy uncertainty, the 2015 Renminbi exchange rate reform, and the COVID-19 pandemic are important determinants of the CNY/USD and CNH/USD spillover in China. Our results provide useful implications for investors, multinational corporations, and policymakers.

Keywords: Financial connectedness, Diebold and Yilmaz index, CNH/USD, CNY/USD