Uncertainty and financial market resilience: Evidence from China

TL;DR

This paper assesses China's financial market resilience, examining how external shocks and uncertainties affect its ability to withstand and recover from disruptions, with insights into spillover dynamics and policy implications.

Contribution

It introduces standardized measures for financial market resilience and analyzes the impact of various uncertainties on different sub-markets in China.

Findings

Market resilience is event-driven and correlated across sub-markets.

Foreign exchange market is a key spillover transmitter.

Geopolitical and trade uncertainties negatively impact resilience.

Abstract

Financial market resilience reflects the ability of a financial market to withstand external shocks and to recover from them, while its measurement has yet to be standardized. Accordingly, this paper quantifies the adaptability and recoverability of China's total financial market and five key sub-markets as both proxy indicators of their resilience. The results highlight the event-driven nature of China's financial market resilience and reveal a strong correlation between the two indicators, which is more pronounced in the stock and bond markets. Using the Diebold-Yilmaz connectedness approach, we further examine volatility spillovers among resilience of sub-markets and identify the foreign exchange market as a major transmitter of spillovers, whereas the stock and bulk commodity markets primarily act as net recipients of spillovers. Moreover, we analyze the impacts of five China-related uncertainties on financial market resilience. Overall, geopolitical risks, economic and trade policy uncertainty, and U.S.-China tensions exert significant negative impacts on total market resilience, while the effect of climate policy uncertainty remains less pronounced. Importantly, the impacts of different uncertainties exhibit heterogeneity across resilience of sub-markets. Our findings not only enrich the resilience measurement of financial market but also provide new evidence to inform targeted risk management and policy design aimed at strengthening financial system's resilience.