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The existence of flight-to-quality under extreme conditions: Evidence from a nonlinear perspective in Chinese stocks and bonds' sectors

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  • Deng, Chao
  • Su, Xiaojian
  • Wang, Gangjin
  • Peng, Cheng

Abstract

The COVID-19 pandemic has showed that distress to the financial system is always accompanied with the interconnection between the stock and bond markets. However, limited studies have identified the flight-to-quality effect between these two markets from a nonlinear extreme perspective. Thus, using the multi-quantile VaR Granger causality test that measures the non-linearity of extreme risk, we investigated this effect in Chinese sectors via extreme risk spillover networks. Based on the findings, defensive (offensive) sectors are dominant in the stock market when facing upside (downside) risk to avoid potential investment losses. The results also confirm the robustness of the conclusion that the investment function of the financial markets weakened during the financial crisis. Moreover, compared to the Financial Bond and Enterprise Bond, the Government Bond is likely to show better risk hedging effect in cross-market risk spillover networks due to its high information transparency.

Suggested Citation

  • Deng, Chao & Su, Xiaojian & Wang, Gangjin & Peng, Cheng, 2022. "The existence of flight-to-quality under extreme conditions: Evidence from a nonlinear perspective in Chinese stocks and bonds' sectors," Economic Modelling, Elsevier, vol. 113(C).
    • Handle: RePEc:eee:ecmode:v:113:y:2022:i:c:s0264999322001419
    DOI: 10.1016/j.econmod.2022.105895
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    More about this item

    Keywords

    Extreme risk spillover; Granger causality network; Financial crisis; Stock market; Bond market;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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