Aloui 2022 23

Research in International Business and Finance 62 (2022) 101709
Contents lists available at ScienceDirect
Research in International Business and Finance

journal homepage: www.elsevier.com/locate/ribaf
Full length article
Tail-risk spillovers from China to G7 stock market returns during the

COVID-19 outbreak: A market and sectoral analysis
Riadh Aloui a , Sami Ben Jabeur b , Salma Mefteh-Wali c ,∗
a LAREQUAD, Tunis Business School, University of Tunis, El Mourouj, 2074 Ben Arous, Tunisia
b Institute of Sustainable Business and Organizations, Confluence: Sciences et Humanités - UCLY, ESDES,
10, place des archives, 69002, Lyon, France
c
ESSCA School of Management, 1 rue Lakanal, 49003, Angers, France
ARTICLE INFO ABSTRACT
JEL classification: This study uses a combination of copulas and CoVaR to investigate risk spillovers from China
C58 to G7 countries before and during the COVID-19 pandemic. Using daily data on stock and
F37 equity sectors for the period from January 1, 2013 to June 9, 2021, the main empirical results
G17
show that, before the COVID-19 pandemic, stock markets were positively related and systemic
Q43
risk was comparable for all countries. However, during the COVID-19 outbreak, the level of
Keywords: dependence increased for all G7 countries and the upside–downside risk spillovers become on
Copulas average higher for all stock markets, with the exception of Japan. Our results also provide
Stock indices
evidence of higher market risk exposure to information from China for the technology and
Equity sectors
energy sectors. Moreover, we find an asymmetric risk spillover from China to the G7 stock
VaR
CoVaR markets, with higher intensity in downside risk spillovers before and during COVID-19 spread.
Systemic risk
1. Introduction
The global economy is facing the worst financial crisis, triggered by the COVID-19 outbreak since the US subprime crisis and
Great Depression. In addition to dramatic health implications, the severity and spread of COVID-19 poses unprecedented challenges
to global value chains and negatively impact investments and consumption patterns. The pandemic induced uncertainty and panic
lead to lower cash flow expectations, and higher level of price volatility of financial assets. On February 2020, various U.S. stock
market indices including the NASDAQ-100, the S&P 500 Index, and the Dow Jones Industrial Average endured their sharpest declines
since 2008. In early March 2020, stock markets have declined over 30%; implied volatilities of equities and oil have spiked to crisis
levels (OECD, 2020).1
The official announcements regarding the COVID-19 new cases of infection and fatality ratio, was found to be an important source
of financial markets volatility (Albulescu, 2021; Ashraf, 2020; Rehman et al., 2021; Izzeldin et al., 2021). Other authors argue that
the pandemic also impacts the stock market through halting industrial, tourism, aviation and other related sectors. Consequently,
some industry sectors experienced higher volatility than others, which affect the investment decisions and the potential benefits of
portfolio diversification.
Much effort has been made recently to better explain and evaluate how risk spreads across stock markets during turbulent
periods (see among others Kang et al., 2019; Akhtaruzzaman et al., 2021; Su, 2020; Abuzayed et al., 2021). However, most of these
∗ Corresponding author.
E-mail addresses: riadh.aloui@tunis-business-school.tn (R. Aloui), sbenjabeur@gmail.com (S. Ben Jabeur), salma.mefteh@essca.fr (S. Mefteh-Wali).
1 Global financial markets policy responses to COVID-19, OECD, Retrieved 2020-06-16.
https://doi.org/10.1016/j.ribaf.2022.101709
Received 21 December 2021; Received in revised form 9 May 2022; Accepted 24 June 2022
Available online 8 July 2022
0275-5319/© 2022 Elsevier B.V. All rights reserved.
R. Aloui et al. Research in International Business and Finance 62 (2022) 101709
Table 1
Characteristics of bivariate copula models.
Name Copula Parameter range Kendall’s 𝜏 Tail dependence (𝜆𝐿 , 𝜆𝑈 )
2
Gaussian 𝐶𝑁 (𝑢, 𝑣 |𝜌 ) = 𝜙(𝜙−1 (𝑢), 𝜙−1 (𝑣)) 𝜌 ∈ (−1, 1) arcsin(𝜌) (0, 0)
𝜋
𝜋
Student-t 𝐶𝑆𝑇 (𝑢, 𝑣|𝜌, 𝑣) = 𝑇 (𝑡−1 (𝑢), 𝑡−1 (𝑣)) 𝜌 ∈ (−1, 1), 𝜐 > 2 arcsin(𝜌) 𝜆𝐿 = 𝜆𝑈
𝑣 𝑣 2 ( √ √ )
= 2𝑡𝜐+1 − 𝜐 + 1 1−𝜌1+𝜌
( 1
)
1
Gumbel 𝐶𝐺 (𝑢, 𝑣 |𝜃 ) = exp(−[(− ln 𝑢)𝜃 + (− ln 𝑣)𝜃 ]1∕𝜃 ) 𝜃≥1 1− 𝜃
0, 2 − 2− 𝜃
( 1
)
1
Rotated Gumbel 𝐶𝑅𝐺 (𝑢, 𝑣 |𝜃 ) = 𝑢 + 𝑣 − 1 + 𝐶𝐺 (1 − 𝑢, 1 − 𝑣 |𝜃 ) 𝜃≥1 1− 𝜃
2 − 2− 𝜃 , 0
𝜃
Clayton 𝐶𝐶 (𝑢, 𝑣 |𝜃 ) = (𝑢−𝜃 + 𝑣−𝜃 − 1)−1∕𝜃 𝜃 ∈ (0, ∞) 𝜃+2
(2−1∕𝜃 , 0)
Symmetric Joe–Clayton 𝐶𝑆𝐽 𝐶 (𝑢, 𝑣|𝜆𝑈 , 𝜆𝐿 ) = 0.5. 𝜆𝑈 , 𝜆𝐿 ∈ (0, 1) no closed form (2−1∕𝛾 , 2 − 2−1∕𝜅 )
(𝐶𝐽 𝐶 (𝑢, 𝑣|𝜆𝑈 , 𝜆𝐿 ) + 𝐶𝐽 𝐶 (1 − 𝑢, 1 − 𝑣|𝜆𝑈 , 𝜆𝐿 ) + 𝑢 + 𝑣 − 1)
Notes: The table summarizes the properties of bivariate copula families used in this work. 𝜙 and 𝑡𝑣 are the gaussian and the Student-t c.d.f with 𝑣 degrees of
freedom. 𝐶𝐽 𝐶 denotes the Joe–Clayton (BB7) copula given by 𝐶𝐽 𝐶 (𝑢, 𝑣 ||𝜆𝑈 , 𝜆𝐿 ) = 1 − (1 − {[1 − (1 − 𝑢)𝜅 ]−𝛾 + [1 − (1 − 𝑣)𝜅 ]−𝛾 − 1}−1∕𝛾 )−1∕𝜅 with 𝜅 = 1∕ log2 (2 − 𝜆𝑈 ) and
𝛾 = −1∕ log2 (𝜆𝐿 ).
studies investigate the spillovers by modeling conditional volatility and correlation, often using a GARCH-type model. The major
drawback of such an indirect measurement method is that the extreme systemic risk in global stock markets is ignored and therefore
the systemic risk spillover will be underestimated (Yu et al., 2018). It appears also from the literature that the study of spillovers
between stock sectors have not received much attention compared with the focus on the relationship among international aggregate
stock markets.
In this study, we rely on the combination of Copula models and the tail-risk interdependence conditional value at risk (CoVaR)
developed by Adrian and Markus (2016). The CoVaR extends the standard regulatory tool of unconditional VaR by carrying about
how financial difficulties of one market can increase the tail risk of other markets. Copula models are known to be more flexible
and to better characterize the dependence between variables both at the center and the tails of the distribution. This information
about the joint behavior of both variables is essential to derive accurate measures of the VaR and CoVaR.
We contribute to the ongoing debate and research regarding the volatility spillover effect across stock markets during the
COVID-19 pandemic in the following aspects. First, we extend previous studies on the spillovers among stock returns that often
consider mean–variance effects or symmetry in the dependence structure by exploring them at the upper and lower tails of the
return distribution, while controlling for other stylized facts like asymmetry and time-varying dependence. This is achieved by
fitting copula models and testing for extreme risk spillover effects across markets using the VaR and CoVaR measures. Second, we
carry out our study at both market and sectoral levels, before and during the COVID-19 crisis. This provides a more comprehensive
understanding of the magnitude and direction of risk spillovers among industry sector groups, which in turn enhances portfolio
allocation decisions and trading strategies. Our findings are also valuable for policy makers in terms of building economic resilience
strategies by identifying which sectors are most exposed to downside–upside risk spillovers. Our work is thus mostly related to that
of Ghorbel et al. (2022) who use ADCC-GARCH models to analyze the risk spillovers between China and G7 stock markets before and
during the COVID-19 crisis. However, we differ from it in that we use a large set of static and dynamic copulas, allowing us to flexibly
and fully characterize the dependence structure between stock market returns, while avoiding the drawbacks of linear measures of
interdependence (e.g., Pearson correlation and dynamic conditional correlation coefficients obtained from a DCC–GARCH model).
This information regarding the dependence structure is crucial to compute the value at risk (VaR) of one market conditional on
another market or sector fall into financial distress (Reboredo and Ugolini, 2015). Second, we conduct our analysis at both the
aggregate market and sectoral levels, specifically to differentiate between the sector reaction and the market reaction as a whole.
Finally, since we have studied the risk spillovers between China and G7 stock markets over a more recent period (January 1, 2013
to June 9, 2021), our results complement those of almost all previous works whose study periods cover the first wave of COVID-19
only.
We found evidence of a positive relationship between China and G7 stock markets, with dependence level and structure differed
across subperiods. A similar conclusion was reached for the relationship between China and G7 stock sectors. Our empirical results
reveal also that systemic risk spillover is intensified during the COVID-19 period and show an asymmetric behavior with downside
movements greater than upside movements. In particular, we conclude that during the pandemic, the downside risk spillover from
China was of most intensity for Italy, Germany, France and UK stock markets. At the same time, we found that the energy, financials,
technology and basic materials stock sectors were heavily exposed to the downside tail risk, while telecommunication and non
cyclical goods sectors have been relatively spared.
This paper proceeds as follows. Section 2 presents a review of the related literature on the financial contagion. Section 3 develops
the methodology. Section 4 presents the data and the preliminary analysis. In Section 5, the empirical results are reported and
interpreted. Finally, Section 6 draws conclusions concerning the main themes covered in this paper.
2. Literature review
A review of major theoretical and empirical studies focusing on financial market comovement emphasize the fact that a significant
increase in cross-market linkages after a shock is an indicator of the presence of contagion (Forbes and Rigobon, 2002; Dimitriou
et al., 2013; Flavin and Sheenan, 2015; Andriosopoulos et al., 2017; Gkillas et al., 2019; Fang et al., 2021; Li, 2021).
2
Table 2
Summary statistics of stock index returns.
G7 China Germany Canada USA Italy France Japan UK
The pre-crisis period
Min −4.945 −6.606 −8.757 −4.018 −4.136 −15.693 −10.083 −6.330 −11.467
Mean 0.043 0.027 0.022 0.014 0.052 0.019 0.032 0.032 0.016
Max 3.512 5.849 4.816 4.442 4.854 6.806 5.757 6.390 5.742
SD 0.695 1.182 1.060 0.871 0.798 1.391 1.039 1.105 0.973
Skew. −0.731 −0.171 −0.499 −0.140 −0.526 −0.917 −0.652 −0.274 −0.996
Kurt. 4.277 2.295 4.082 2.428 3.797 10.223 6.787 3.589 13.766
𝑄(12) 40.772∗ 41.994∗ 29.179∗ 37.864∗ 14.474 32.944∗ 32.990∗ 93.895∗ 53.685∗
𝑄2 (12) 326.356∗ 261.602∗ 144.521∗ 679.081∗ 489.611∗ 113.981∗ 184.671∗ 416.230∗ 394.698∗
JB 1543.09∗ 405.73∗ 1332.98∗ 450.24∗ 1171.64∗ 8150.02∗ 3606.82∗ 994.56∗ 14616.4∗
ARCH 165.997∗ 154.413∗ 93.426∗ 241.658∗ 216.623∗ 80.466∗ 112.593∗ 222.591∗ 217.295∗
KPSS 0.051 0.049 0.052 0.043 0.048 0.061 0.055 0.038 0.052
The crisis period
Min −10.723 −6.091 −15.094 −14.204 −12.917 −20.544 −14.903 −6.517 −14.161
Mean 0.073 0.070 0.063 0.070 0.082 0.046 0.057 0.045 0.009
Max 8.683 4.942 10.243 12.214 8.992 8.623 8.471 7.102 10.995
SD 1.640 1.520 1.826 1.964 1.862 2.009 1.831 1.265 1.828
Skew. −1.286 −0.457 −1.545 −1.688 −1.037 −3.256 −1.575 0.022 −1.104
Kurt. 13.030 1.379 15.939 19.497 12.171 32.185 14.447 5.289 13.806
𝑄(12) 147.661∗ 15.793 48.209∗ 102.696∗ 193.259∗ 52.148∗ 49.260∗ 19.365∗∗∗ 42.290∗
𝑄2 (12) 431.813∗ 142.241∗ 87.431∗ 398.714∗ 498.924∗ 38.535∗ 114.579∗ 146.926∗ 132.038∗
JB 2686.07∗ 41.36∗ 4015.8∗ 5965.97∗ 2320.64∗ 16445.2∗ 3331.09∗ 424.10.52∗ 2976.40∗
ARCH 146.844∗ 81.34∗ 73.288∗ 133.483∗ 157.770∗ 35.498∗ 73.984∗ 84.994∗ 87.835∗
KPSS 0.068 0.084 0.067 0.056 0.062 0.064 0.060 0.094 0.059
Notes: The table displays summary statistics of log change of stock price indices in G7 (regional), China, Germany, Canada, USA, Italy, France, Japan and the
UK (Daily Data). Q(12) and Q2 (12) are the Ljung–Box statistics for serial correlation. JB is the empirical statistic of the Jarque–Bera test for normality. ARCH
is the Lagrange multiplier test for autoregressive conditional heteroskedasticity. KPSS is the Kwiatkowski et al. (1992) test for stationarity with a constant and
time trend. *, ** and *** indicate the rejection of the null hypotheses of no autocorrelation, normality, homoscedasticity and stationarity at the 1%, 5% and
10% levels of significance respectively for statistical tests.
Table 3
Summary statistics for sector returns.
Energy Bas. mat. Indust. Cyc.Gds Non-Cyc.Gds Financials Health. Techn. Telecom. Utilities
The pre-crisis period
Min −12.244 −4.929 −5.340 −5.413 −3.430 −7.478 −4.022 −4.665 −4.157 −4.006
Mean −0.001 0.018 0.046 0.045 0.036 0.038 0.052 0.068 0.032 0.035
Max 18.027 3.221 2.933 3.851 3.064 2.815 3.723 5.512 3.587 3.357
SD 1.256 0.870 0.707 0.706 0.601 0.780 0.798 0.955 0.707 0.707
Skew. 0.930 −0.351 −0.659 −0.678 −0.544 −0.957 −0.455 −0.538 −0.300 −0.525
Kurt. 28.985 1.911 3.565 3.927 3.115 6.818 2.332 3.407 2.935 2.254
𝑄(12) 15.899 63.468∗ 87.730∗ 62.566∗ 28.802∗ 47.757∗ 24.908∗∗ 28.272∗ 23.541∗∗ 16.376
𝑄2 (12) 260.769∗ 217.523∗ 222.587∗ 297.045∗ 144.685∗ 207.026∗ 256.855∗ 440.777∗ 89.329∗ 82.673∗
JB 63749.35∗ 312.38∗ 1090.64∗ 1303.19∗ 821.80∗ 3787.75∗ 472.57∗ 963.85∗ 676.81∗ 466.69∗
ARCH 285.882∗ 120.217∗ 123.809∗ 143.255∗ 99.102∗ 133.340∗ 135.480∗ 188.119∗ 68.903∗ 61.613∗
KPSS 0.059 0.046 0.046 0.048 0.038 0.054 0.071 0.033 0.048 0.044
The crisis period
Min −21.229 −10.446 −9.955 −10.145 −9.209 −13.066 −9.165 −13.364 −8.492 −11.804
Mean −0.002 0.084 0.058 0.096 0.052 0.062 0.059 0.121 0.025 0.021
Max 15.358 10.282 9.003 7.965 6.100 10.655 6.579 9.053 4.933 9.728
SD 2.917 1.675 1.634 1.592 1.240 2.100 1.459 1.998 1.201 1.778
Skew. −1.282 −0.897 −0.949 −1.346 −0.960 −1.034 −0.700 −0.885 −1.040 −0.580
Kurt. 12.948 10.445 10.184 11.163 13.092 10.250 9.273 9.451 10.048 12.122
𝑄(12) 51.322∗ 53.943∗ 63.447∗ 76.289∗ 111.625∗ 82.464∗ 141.478∗ 142.873∗ 93.367∗ 102.608∗
𝑄2 (12) 189.386∗ 238.099∗ 339.685∗ 269.311∗ 462.496∗ 372.398∗ 519.729∗ 347.929∗ 346.463∗ 620.077∗
JB 2653.4∗ 1708.9∗ 1633.179∗ 2008.15∗ 2665.6∗ 1664.05∗ 1337.63∗ 1406.58∗ 1602.317∗ 2256.53∗
ARCH 93.910∗ 93.595∗ 107.755∗ 132.079∗ 164.639∗ 116.599∗ 173.260∗ 126.743∗ 126.583∗ 186.638∗
KPSS 0.055 0.088 0.083 0.096 0.049 0.065 0.044 0.056 0.054 0.033
Notes: The table displays summary statistics of log change of G7 sectoral indices (Daily Data). Q(12) and Qž(12) are the Ljung–Box statistics for serial correlation.
JB is the empirical statistic of the Jarque–Bera test for normality. ARCH is the Lagrange multiplier test for autoregressive conditional heteroskedasticity. KPSS is
the Kwiatkowski et al. (1992) test for stationarity with a constant and time trend. *, ** and *** indicate the rejection of the null hypotheses of no autocorrelation,
normality, homoscedasticity and stationarity at the 1%, 5% and 10% levels of significance respectively for statistical tests.
Since the seminal work of Markowitz (1952), a large number of useful techniques have been developed and used to investigate
the relationship between financial time series data. For instance, Pearson and Spearman’s correlation represent the most common
3
Fig. 1. Time series plot of daily stock indices for the G7 (regional and country indices).
Fig. 2. Time series plot of daily sectoral indices for the G7 (regional indices).
technique used to evaluate linkages among financial markets (e.g., Bonanno et al., 2004; Durante and Pappadà, 2014). However,
when the usual assumption of multivariate normality is in question, applying this technique to measure the dependence between
returns could lead to underestimate the joint risk of extreme events.
The proposed connectedness approach of Diebold and Yilmaz (2008) and Diebold and Yılmaz (2014), based directly on the
notion of variance decompositions in vector autoregressions, is another useful tool that has been applied in many related studies
(Caloia et al., 2019; Mensi et al., 2021; He and Hamori, 2021). Aloui et al. (2011) used copula functions to examine the contagion
effects between the US and BRIC stock markets and conclude that the dependency on the US is larger for countries with higher
sensitivity to commodity-price changes. Jung and Maderitsch (2014) explored the volatility transmission between stock markets in
Europe, Hong Kong, and the United States over the period 2000–2011. Using heterogeneous autoregressive distributed lag model,
the authors reveal time-variation and structural breaks in volatility spillovers during the financial crisis of 2007. Shen et al. (2015)
examined the contagion influence of the European debt crisis on China’s stock market by the Kalman filter approach. The proposed
model confirms that crisis contagion definitely happens between countries that trade more often with each other. Mensi et al. (2017)
combined variational mode decomposition (VMD) method and copula functions to examine the dependence structure between crude
4
Table 4
Correlation between stock indices in the precrisis period (lower triangle) and the crisis period (upper triangle)
G7 0.516 0.730 0.896 0.987 0.712 0.737 0.333 0.739
China 0.426 0.497 0.500 0.470 0.423 0.491 0.379 0.500
Germany 0.673 0.376 0.764 0.633 0.903 0.954 0.402 0.889
Canada 0.738 0.331 0.555 0.854 0.752 0.780 0.289 0.802
USA 0.952 0.326 0.499 0.648 0.625 0.638 0.228 0.641
Italy 0.608 0.300 0.809 0.519 0.457 0.917 0.328 0.858
France 0.697 0.382 0.930 0.588 0.519 0.853 0.401 0.920
Japan 0.233 0.320 0.122 0.142 0.034 0.068 0.131 0.415
UK 0.679 0.406 0.805 0.633 0.489 0.740 0.844 0.180
Notes: The table gives the unconditional correlation between daily returns of China and the G7 stock markets in the precrisis
and crisis periods.
Table 5
Correlation between the G7 sectoral indices and China in the precrisis period (lower triangle) and the crisis period (upper triangle)
China Energy Bas. mat. Indust. Cyc.Gds Non-Cyc.Gds Financials Health. Techn. Telecom. Utilities
China 0.439 0.499 0.503 0.536 0.386 0.437 0.457 0.499 0.433 0.334
Energy 0.250 0.816 0.828 0.734 0.667 0.860 0.634 0.598 0.690 0.603
Bas. mat. 0.435 0.652 0.924 0.872 0.821 0.880 0.784 0.731 0.813 0.769
Indust. 0.451 0.587 0.830 0.910 0.843 0.940 0.812 0.752 0.847 0.797
Cyc.Gds 0.446 0.539 0.747 0.901 0.810 0.852 0.831 0.888 0.800 0.751
Non-Cyc.Gds 0.268 0.412 0.552 0.684 0.703 0.820 0.868 0.762 0.905 0.893
Financials 0.385 0.592 0.747 0.867 0.836 0.633 0.760 0.705 0.833 0.790
Health. 0.306 0.451 0.575 0.722 0.737 0.651 0.709 0.853 0.813 0.816
Techn. 0.388 0.488 0.614 0.769 0.806 0.575 0.711 0.728 0.711 0.694
Telecom. 0.289 0.409 0.532 0.603 0.609 0.672 0.577 0.492 0.437 0.846
Utilities 0.147 0.345 0.414 0.462 0.451 0.693 0.427 0.435 0.347 0.573
Notes: The table gives the unconditional correlation between daily sectoral indices of China and the G7 markets in the precrisis and crisis periods.
oil prices and major regional developed stock markets under different investment horizons. The findings show that there is tail
dependence between oil and all stock markets for the raw return series. More recently, Davidson (2020) proposed a novel model
switching approach to analyze contagion from the US to Argentina, Brazil and Mexico. Empirical results show that contagion exists
during the global financial crisis while early crises exhibit interdependence only. Elgammal et al. (2021) examine the dynamic
relationships, at both return and volatility levels, between global equity, energy and gold markets prior to and during the COVID-19
crisis. Under the COVID-19 regime, the authors provide evidence of bidirectional return spillover effects between equity and gold
markets and unidirectional spillovers from energy markets to the equity and gold returns.
Evidence of extreme risk spillovers between stock markets has been well documented in the literature, especially during periods of
market turbulence. Focusing on the COVID-19 period, Bissoondoyal-Bheenick et al. (2021) show that both stock return and volatility
connectedness increase across the different phases of the pandemic for the G20 members. They also find that this connectedness
is intensified as the severity of the pandemic increases. Akhtaruzzaman et al. (2021) show that dynamic conditional correlations
(DCCs) between Chinese and G7 financial and nonfinancial stock returns increased significantly during the COVID-19 period. The
empirical results indicate also the importance of financial firms in financial contagion transmission. So Mike et al. (2020) used
dynamic financial networks based on correlations and partial correlations of stock returns to assess the impacts of the COVID-19
pandemic on the connectedness of the Hong Kong financial market. The results show an increase in both the network density and
clustering in the partial correlation networks during the COVID-19 crisis. Azimli (2020) applied a quantile regression to investigate
the COVID-19 pandemic’s effect on the degree and structure of risk-return dependence in the US. They conclude that the pandemic
changed the dependence and structure of risk-return relationship. Izzeldin et al. (2021) used a smooth transition HAR model in
order to examine the impact of COVID-19 on G7 stock markets and sectors. They conclude that the Health Care and Consumer
services sectors were most affected by the crisis, while the Technology sector was hit least severely. Tiwari et al. (2022) use various
techniques: Diebold and Yılmaz (2014) (DY, hereafter) spillover indices and TVP-VAR, LASSO-VAR to examine the connectedness
between energy sector stocks of 20 regional blocs. They conclude that during the US subprime crisis and COVID-19 pandemic,
energy stock market spillovers have increased substantially. Caselli et al. (2020) investigated the impact of the COVID-19 pandemic
on G20 stock markets using the spillover index approach by Diebold and Yilmaz (2008) and Diebold and Yılmaz (2014). The findings
show that the developed markets are the main spillover transmitters while the emerging markets are the main spillover receivers
in volatility transmissions.
The complex nature of financial systems highlights the needs of more sophisticated tools when considering tail risk between
financial markets or institutions. To extend the traditional measure of market risk VaR, Adrian and Markus (2016) introduced the
conditional value at risk (CoVaR) as the VaR of a specific market conditional on the fact that another market is in distress. Using
a combination of CoVaR and copula models, Reboredo and Ugolini (2015) studied the systemic risk in European sovereign bond
markets before and during the Greek debt crisis. The authors find that, before the debt crisis, sovereign bond markets were all
dependent and financial risk was comparable for all considered countries. However, with the onset of the debt crisis, systemic risk
5
Table 6
Marginal estimation results for stock returns.
Mean
𝜙0 0,043 0.038 0.020 0.023 0.055∗ 0.035 0.028 0.023 0.007
(0.013) (0.026) (0.021) (0.015) (0.014) (0.027) (0.026) (0.021) (0.354)
𝜙1 0,048∗∗ 0.081∗ −0.035∗∗∗ 0.041∗∗∗ −0.072∗ −0.060∗ −0.035 −0.147∗ −0.020

(0.023) (0.021) (0.021) (0.022) (0.022) (0.022) (0.026) (0.023) (0.360)
𝜙2 0,003 −0.010 −0.002 0.004 0.000 −0.020

(0.026) (0.021) (0.021) (0.019) (0.012) (0.032)
𝜙3 0.030
(0.022)
Variance
𝜔 0.021∗ 0.065∗∗ 0.028∗∗ 0.012∗ 0.030∗ 0.049∗∗ 0.032∗ 0.051∗∗ 0.045∗
(0.005) (0.029) (0.012) (0.004) (0.006) (0.020) (0.011) (0.020) (0.016)
𝛼 0.015 0.030∗ 0.000 0.015 0.017 0.011 0.014 0.034∗∗ 0.027

(0.014) (0.011) (0.010) (0.012) (0.020) (0.012) (0.015) (0.016) (0.041)
𝛽 0.828∗ 0.879∗ 0.920∗ 0.906∗ 0.804∗ 0.902∗ 0.880∗ 0.848∗ 0.840∗

(0.024) (0.034) (0.024) (0.017) (0.025) (0.026) (0.026) (0.039) (0.118)
𝜆 0.258∗ 0.096∗ 0.116∗ 0.126∗ 0.312∗ 0.122∗ 0.164∗ 0.162∗ 0.193∗

(0.046) (0.033) (0.032) (0.023) (0.05) (0.029) (0.033) (0.048) (0.041)
Asym. −0.147∗ −0.048∗∗∗ −0.121∗ −0.175∗ −0.157∗ −0.125∗ −0.154∗ −0.127∗ −0.126
(0.029) (0.025) (0.027) (0.029) (0.031) (0.030) (0.035) (0.031) (0.301)
Tail 5.634∗ 7.173∗ 5.134∗ 8.553∗ 5.352∗ 5.874∗ 5.860∗ 6.039∗ 5.202∗
(0.720) (1.140) (0.301) (1.472) (0.668) (0.750) (0.747) (0.699) (1.110)
LogLik 2164.69 6922.98 3173.49 2656.47 2420.32 3639.51 3069.07 3077.69 2876.93
Lj 8.772 8.004 12.652 9.827 7.135 12.581 8.489 11.650 15.564

[0.643] [0.713] [0.317] [0.546] [0.788] [0.322] [0.669] [0.390] [0.158]
Lj2 8.505 12.930 8.520 9.101 10.030 21.664 10.788 13.187 15.211
[0.668] [0.298] [0.666] [0.613] [0.528] [0.027] [0.461] [0.281] [0.173]
ARCH 8.473 13.433 8.837 8.864 9.960 22.303 11.289 13.007 15.603
[0.747] [0.338] [0.717] [0.715] [0.620] [0.034] [0.504] [0.369] [0.210]
Notes: The table summarizes the GJR-GARCH estimation results. The values between brackets represent the standard error of the parameters.
LogLik is the log-likelihood statistic. Lj and Lj2 denote the Ljunk–Box statistics with 12 lags for serial correlation in the residual and the squared
residual models, respectively. ARCH is the Lagrange multiplier test for autoregressive conditional heteroskedasticity effect in the residuals up to
12th order. 𝑃 -values associated with the tests are reported in square brackets.
decreased for all countries in crisis, except Spain. Reboredo et al. (2016) examine tail risk spillovers between exchange rates and
stock prices and conclude that downside and upside spillovers are asymmetric with greater spillovers from and to the USD than
from and to the EUR. Ji et al. (2018) used a time-varying copula based CoVaR model to examine the impact of uncertainties on
energy prices. The empirical findings reveal an asymmetry in upside and downside risk spillovers, with energy prices being more
affected by an increase in uncertainty. Tian and Ji (2021) analyze the risk spillovers from four financial markets to the developed
market’s financial system using a GARCH copula quantile regression-based CoVaR model. Their findings show that risk spillovers
are substantially bigger during the COVID-19 epidemic than during the banking and sovereign debt crises. Hanif et al. (2021) have
used Copula and Conditional Value at Risk approaches to examine the impacts of COVID-19 outbreak on the spillover between ten
US and Chinese equity sectors. Their results show time varying bidirectional asymmetric risk spillovers from the US to China and
vice versa. Moreover, the risk spillover is higher from the US to China before COVID-19 and from China to the US during COVID-19
spread. Zehri (2021) employ a GARCH-Copula CoVaR approach to investigate the tail spillovers from the US to Asian stock returns
and conclude that there is a large spillover effect from the US to East Asian stock markets especially during the COVID-19 period.
Ghorbel et al. (2022) used VAR-ADCC models and CoVaR to examine extreme risk spillovers between G7 stock markets and China.
Their results show that during the COVID-19 pandemic a significant and asymmetrical two-way risk transmission exists between
the majority of the considered pair markets. Also, their findings suggest that downward and upward movements are significantly
larger before the COVID-19 pandemic in almost all cases.
The above discussion highlights the importance of understanding how the current pandemic has shaped extreme risk spillovers
between financial markets, which could be of great interest to investors in their decision-making process and policy makers in
stabilizing financial systems. Our literature review indicates also the need for studies considering the impact of catastrophic event on
extreme co-movements among equity sectors (Shahzad et al., 2021). We address this important research gap by focusing specifically
on the risk spillovers from China’s stock market to G7 equity sectors before and during the COVID-19 outbreak.
6
Table 7
Marginal estimation results for sector indices returns.
Energy Bas.mat. Indust. Cyc.Gds Non-Cyc. Gds Financials Health. Techn. Telecom. Utilities
Mean
𝜙0 0.008 0.010 0.032∗∗ 0.031∗∗ 0.035∗ 0.023 0.051∗ −0.068∗ 0.021 0.036∗∗
(0.014) (0.018) (0.014) (0.014) (0.013) (0.015) (0.016) (0.019) (0.015) (0.016)
𝜙1 0.021 0.11∗ 0.132∗ 0.107 0.031 0.079 0.014 −0.020 0.072∗ 0.023
(0.018) (0.024) (0.022) (0.022) (0.023) (0.022) (0.023) (0.022) (0.023) (0.023)
𝜙2 0.011 0.015 −0.008 −0.000 −0.017 0.012 0.013 0.012 0.006 −0.014
(0.017) (0.022) (0.012) (0.032) (0.021) (0.028) (0.020) (0.024) (0.023) (0.019)
𝜙3 −0.005 0.001 −0.006
(0.026) (0.023) (0.023)
Variance
𝜔 0.019∗ 0.015∗∗ 0.018∗ 0.018∗ 0.027∗ 0.031∗ 0.301∗ 0.040∗ 0.042∗ 0.024∗∗
(0.006) (0.007) (0.005) (0.005) (0.007) (0.008) (0.006) (0.010) (0.016) (0.010)
𝛼 0.028∗∗ 0.015 0.017 0.038∗∗ 0.032 0.051∗ 0.000 0.000 0.030 0.033
(0.012) (0.015) (0.014) (0.016) (0.021) (0.019) (0.015) (0.017) (0.023) (0.030)
𝛽 0.918∗ 0.921∗ 0.863 0.852∗ 0.815∗ 0.809∗ 0.864∗ 0.853∗ 0.825∗ 0.887∗
(0.015) (0.024) (0.024) (0.023) (0.037) (0.030) (0.019) (0.025) (0.052) (0.041)
𝜆 0.091∗ 0.096∗ 0.193∗ 0.173∗ 0.180∗ 0.246∗ 0.188∗ 0.236 0.135∗ 0.077∗
(0.019) (0.023) (0.037) (0.035) (0.039) (0.050) (0.031) (0.040) (0.039) (0.022)
Asym. −0.071∗∗ −0.131∗ −0.142∗ −0.194∗ −0.095∗ −0.130∗ −0.119∗ −0.182∗ −0.084∗ −0.169∗
(0.028) (0.033) (0.029) (0.0228) (0.028) (0.027) (0.029) (0.028) (0.029) (0.030)
Tail 6.012∗ 6.654∗ 6.057∗ 7.240∗ 6.624∗ 5.207∗ 6.475∗ 4.745∗ 6.894∗ 7.164∗
(0.903) (0.901) (0.757) (1.202) (0.923) (0.610) (0.880) (0.518) (1.013) (0.991)
LogLik 3480.1 2803.5 2302.6 2292.2 1947.8 2542.9 2524.7 2897.4 2316.2 2420.4
Lj 12.697 17.233 13.853 12.469 18.297 8.620 12.084 9.590 8.538 6.681
[0.314] [0.101] [0.241] [0.329] [0.075] [0.657] [0.357] [0.568] [0.665] [0.824]
Lj2 22.877 18.899 10.727 6.198 7.766 9.459 5.041 5.569 8.165 15.803
[0.018] [0.063] [0.466] [0.860] [0.734] [0.580] [0.929] [0.900] [0.698] [0.149]
ARCH 23.407 18.746 10.747 6.025 7.993 9.283 5.027 5.460 8.104 15.956
[0.025] [0.095] [0.551] [0.915] [0.786] [0.679] [0.957] [0.941] [0.777] [0.193]
Notes: see Table 6 notes.
3. Methodology
3.1. Systemic risk measures
In this paper, we investigate the risk spillover from China to G7 stock markets using the CoVaR method proposed by Adrian
and Markus (2016). CoVaR can be defined as the value at risk (VaR) of the financial system 𝑠 conditional on one market or sector
𝑖 fall into financial distress. It has the advantage of capturing the extreme risk spillover as well as the general spillover effects (see
e.g. Girardi and Ergün, 2013; Reboredo and Ugolini, 2015; Reboredo et al., 2016).
Formally, the downside CoVaR is defined as the 𝛽-quantile of the conditional distribution of 𝑅𝑠𝑡 , as follows:
𝑠|𝑖 |
Pr(𝑅𝑠𝑡 ≤ 𝐶𝑜𝑉 𝑎𝑅𝛽,𝑡 |𝑅𝑖𝑡 ≤ 𝑉 𝑎𝑅𝑖𝛼,𝑡 ) = 𝛽 (1)
|
where 𝑉 𝑎𝑅𝑖𝛼,𝑡 is the 𝛼-quantile of China’s stock return distribution, 𝑅𝑠𝑡 denotes returns for the G7 stock markets and 𝑅𝑖𝑡 the returns
for China’s stock market, all at time 𝑡. Likewise, we can measure the upside CoVaR as
𝑠|𝑖 |
Pr(𝑅𝑠𝑡 ≥ 𝐶𝑜𝑉 𝑎𝑅𝛽,𝑡 |𝑅𝑖𝑡 ≥ 𝑉 𝑎𝑅𝑖1−𝛼,𝑡 ) = 𝛽 (2)
|
where 𝑉 𝑎𝑅𝑖1−𝛼,𝑡 now denote the upside VaR of China’s stock returns with a confidence level 1 − 𝛼.
Using copula representation, the conditional probabilities expressed in Eqs. (1) and (2) can be re-written in terms of copulas 𝐶,
respectively as
𝑠|𝑖
𝐶(𝐹 (𝐶𝑜𝑉 𝑎𝑅𝛽,𝑡 ), 𝐺(𝑉 𝑎𝑅𝑖𝛼,𝑡 )) = 𝛼𝛽
𝑠|𝑖 𝑠|𝑖
1 − 𝐹 (𝐶𝑜𝑉 𝑎𝑅𝛽,𝑡 ) − 𝐺(𝑉 𝑎𝑅1−𝛼,𝑡 ) − 𝐶(𝐹 (𝐶𝑜𝑉 𝑎𝑅𝛽,𝑡 ), 𝐺(𝑉 𝑎𝑅𝑖1−𝛼,𝑡 ))
𝑖 = 𝛼𝛽
where 𝐹 and 𝐺 are the marginal distributions of 𝑅𝑠𝑡 and 𝑅𝑖𝑡 respectively. Following Reboredo and Ugolini (2015), a two step
𝑠|𝑖
procedure is employed to estimate the CoVaR. First, we determine the value of 𝐹 (𝐶𝑜𝑉 𝑎𝑅𝛽,𝑡 ) given that 𝛼, 𝛽 and 𝐺(𝑉 𝑎𝑅𝑖𝛼,𝑡 ) are
𝑠|𝑖
known. Second, the CoVaR can be estimated by inverting the marginal distribution function of 𝑅𝑠𝑡 , 𝐹 −1 (𝐹 (𝐶𝑜𝑉 𝑎𝑅𝛽,𝑡 ))
7
Table 8
Copulas estimation results in the precrisis period for China and G7 countries.
G7 Germany Canada USA Italy France Japan UK
Panel A: static copulas
Gaussian
𝜌 0.393 0.369 0.310 0.331 0.306 0.366 0.295 0.402
(0.019) (0.025) (0.020) (0.020) (0.022) (0.023) (0.02) (0.019)
𝐴𝐼𝐶 −276.32 −254.573 −172.548 −193.310 −172.377 −248.694 −155.809 −300.661
Student-t
𝜌 0.394 0.371 0.313 0.332 0.307 0.367 0.292 0.405
(0.020) (0.025) (0.022) (0.022) (0.023) (0.021) (0.024) (0.021)
𝑣 25.195 13.419 23.353 26.686 14.243 23.397 10.779 13.802
(12.597) (4.728) (12.781) (18.175) (5.528) (12.08) (3.025) (4.924)
𝐴𝐼𝐶 −284.846 −264.910 −175.692 −195.370 −180.093 −251.893 −168.011 −309.699
Gumbel
𝜃 1.308 1.271 1.219 1.246 1.210 1.259 1.204 1.307
(0.028) (0.026) (0.022) (0.023) (0.021) (0.027) (0.020) (0.027)
𝐴𝐼𝐶 −247.557 −209.122 −143.905 −171.750 −138.975 −191.550 −130.553 −247.204
Rotated Gumbel
𝜃 1.295 1.291 1.219 1.228 1.227 1.284 1.210 1.328
(0.026) (0.024) (0.021) (0.022) (0.022) (0.024) (0.022) (0.025)
𝐴𝐼𝐶 −245.890 −256.009 −155.447 −163.564 −181.117 −246.746 −163.887 −299.224
Clayton
𝜃 0.191 0.198 0.156 0.158 0.165 0.195 0.156 0.217
(0.012) (0.012) (0.013) (0.012) (0.013) (0.012) (0.012) (0.012)
AIC −215.635 −237.477 −142.692 −146.893 −168.050 −231.831 −151.443 −274.044
Symmetric Joe–Clayton
𝜆𝑈 0.204 0.184 0.107 0.160 0.069 0.096 0.078 0.138
(0.035) (0.032) (0.035) (0.035) (0.033) (0.035) (0.034) (0.037)
𝜆𝐿 0.161 0.238 0.145 0.128 0.188 0.239 0.165 0.268
(0.031) (0.029) (0.032) (0.031) (0.030) (0.029) (0.028) (0.029)
AIC −264.863 −258.933 −163.537 −182.824 −182.874 −247.323 −169.496 −300.587
Panel B: dynamic copulas
TVP-Gaussian
𝛼 0.009 0.013 0.010 0.007 0.030 0.023 0.004 0.025
(0.004) (0.006) (0.004) (0.003) (0.012) (0.048) (0.025) (0.012)
𝛽 0.990 0.982 0.987 0.992 0.919 0.961 0.156 0.898
(0.006) (0.011) (0.006) (0.004) (0.040) (0.113) (0.259) (0.042)
𝐴𝐼𝐶 −312.365 −282.004 −191.855 −218.902 −187.094 −281.441 −153.735 −306.314
TVP-Student-t
𝛼 0.010 0.014 0.010 0.009 0.030 0.024 0.000 0.024
(0.005) (0.006) (0.004) (0.004) (0.012) (0.030) (0.016) (0.012)
𝛽 0.988 0.981 0.986 0.990 0.921 0.963 0.729 0.905
(0.007) (0.011) (0.007) (0.006) (0.039) (0.069) (0.048) (0.047)
𝑣 29.505 15.059 31.727 28.132 14.915 27.859 11.033 14.290
(25.918) (5.903) (17.134) (30.383) (5.663) (26.238) (3.217) (5.350)
𝐴𝐼𝐶 −312.657 −287.580 −191.641 −219.016 −185.566 −281.977 −164.380 −312.376
TVP-Gumbel
𝜔 1.030 −0.220 0.767 0.931 0.295 0.824 1.320 1.003
(0.361) (0.754) (0.342) (0.354) (0.357) (0.748) (0.375) (0.371)
𝛽 −0.147 0.643 −0.079 −0.176 0.277 −0.022 −0.964 −0.269
(0.225) (0.351) (0.638) (0.485) (0.489) (0.484) (0.542) (0.524)
𝛼 −1.134 −0.306 −0.762 −0.835 −0.646 −1.119 1.059 −0.397
(0.392) (0.454) (0.321) (0.355) (0.376) (0.569) (0.354) (0.375)
𝐴𝐼𝐶 −250.022 −220.256 −151.019 −178.914 −148.239 −259.502 −135.684 −250.058
TVP-Rotated Gumbel
𝜔 1.123 −0.365 1.935 1.209 −0.384 0.413 1.318 1.048
(0.361) (0.754) (0.342) (0.354) (0.357) (0.748) (0.375) (0.371)
𝛽 −0.246 0.734 −0.939 −0.374 0.746 0.232 −0.912 −0.259
(0.225) (0.351) (0.638) (0.485) (0.489) (0.484) (0.542) (0.524)
(continued on next page)
8
Table 8 (continued).
𝛼 −1.042 −0.174 −1.186 −1.042 −0.210 −0.689 0.900 −0.522
(0.392) (0.454) (0.321) (0.355) (0.376) (0.569) (0.354) (0.375)
𝐴𝐼𝐶 −255.821 −265.149 −163.798 −171.605 −189.405 −259.502 −167.902 −302.775
TVP-Clayton
𝜔 −0.098 −0.023 −0.155 −0.173 −0.046 0.024 −2.449 −1.003
(0.138) (0.074) (0.323) (0.191) (0.085) (0.043) (0.231) (0.237)
𝛽 −1.093 −0.325 −0.567 −1.304 −0.499 −0.386 0.324 −0.493
(0.431) (0.132) (0.578) (0.510) (0.218) (0.174) (0.290) (0.370)
𝛼 0.661 0.897 0.771 0.621 0.857 0.929 −0.762 −0.249
(0.145) (0.075) (0.333) (0.174) (0.060) (0.064) (0.102) (0.207)
𝐴𝐼𝐶 −223.005 −237.688 −142.767 −154.435 −169.366 −236.985 −148.424 −272.179
TVP-Symmetric Joe–Clayton
𝜓0,𝑈 1.054 0.209 −0.064 −0.024 0.463 0.646 −6.585 0.040
(0.719) (0.127) (0.462) (0.770) (1.066) (0.932) (1.631) (0.541)
𝜓1,𝑈 −9.118 −1.763 −6.523 −5.700 −9.999 −9.999 7.505 −1.148
(3.708) (1.003) (3.125) (4.115) (5.252) (5.703) (1.297) (1.587)
𝜓2,𝑈 −0.116 0.869 0.038 −0.075 0.110 0.040 −1.002 0.848
(0.297) (0.094) (0.264) (0.421) (0.368) (0.481) (0.002) (0.158)
𝜓0,𝐿 −0.654 −0.758 −1.108 −0.763 0.042 −0.207 −2.851 −0.256
(0.853) (0.777) (0.978) (1.088) (0.163) (0.431) (1.240) (0.963)
𝜓1,𝐿 −3.431 −2.829 −5.131 −5.163 −1.028 −5.005 1.765 −2.616
(3.524) (2.882) (3.485) (4.179) (0.622) (1.803) (4.646) (3.355)
𝜓2,𝐿 −0.357 −0.948 −0.763 −0.343 0.785 −0.998 −0.837 −0.603
(0.230) (0.151) (0.161) (0.192) (0.090) (0.003) (0.188) (0.640)
𝐴𝐼𝐶 −266.780 −259.465 −160.410 −179.615 −184.155 −251.493 −165.494 −295.562
Notes: The table displays the ML estimates for the static and time-varying copula models for China and G7 stock markets returns. Standard errors are between
brackets and Akaike Information criterion (AIC) values are provided for each copula model. Lower AIC values indicate the better-fit copula model.
To test for the significance of downside–upside risk spillover effects, we compare the difference between CoVaR and its
corresponding VaR using the Kolmogorov–Smirnov (K–S) test as proposed by Abadie (2002). Under the null hypothesis of no systemic
impact from China’s stock market to G7 stock market, the statistic of the test is defined as follows:
𝑚𝑛 1∕2
𝐾𝑆𝑚𝑛 = ( ) sup ||𝐹𝑚 (𝑥) − 𝐺𝑛 (𝑥)||
𝑚+𝑛 𝑥
where 𝐹𝑚 (𝑥) and 𝐺𝑛 (𝑥) denote the cumulative CoVaR and VaR distribution functions, respectively, and 𝑛 and 𝑚 are the size of the
two samples.
3.2. Dynamic Copula models
The CoVaR approach implemented in this paper is based on copula estimation results. We will consider different copula functions
having different specifications in terms of generator functions and tail dependence coefficients. Overall, six different copula models
are selected: the Gaussian, Student-t, Gumbel, Rotated Gumbel, Clayton and symmetric Joe–Clayton copula. The properties of these
copula models are summarized in Table 1.
It can be seen that the selected copula models are able to capture symmetric dependence as well as asymmetric dependence
between stock markets. The dependence is symmetric in both tails of the distribution for the Gaussian and Student-t copulas.
The Gaussian copula has no tail dependence while the Student-t copula can capture dependence in the tail. In contrast to the
symmetric copulas, the Gumbel, rotated Gumbel, Clayton and SJC copulas can be used to capture asymmetry between lower and
upper tail. The Gumbel copula exhibits strong right tail dependence and weak left tail dependence, whereas the Clayton copula
shows greater tail dependency in the lower tail instead of the upper tail. The rotated Gumbel can be viewed as a mirror image of
the Gumbel, i.e. it exhibits weak right tail dependence and strong left tail dependence. The SJC copula, introduced in Patton (2006)
as a linear combination of Joe–Clayton copula (BB7), allows for asymmetry in the upper and lower tail and by construction, it nests
the symmetry as a special case (when 𝜆𝑈 = 𝜆𝐿 ).
The parameters of the above mentioned copulas are allowed to vary through time using some specified evolution paths. For
the selected elliptical copulas, i.e. Gaussian and 𝑡 copulas, the time-varying dependence parameter evolves through time as in the
DCC(1,1) model of Engle (2002):
′
𝑄𝑡 = (1 − 𝛼 − 𝛽)𝑄 + 𝛼𝜂𝑡−1 𝜂𝑡−1 + 𝛽𝑄𝑡−1
−1∕2 −1∕2
𝑅𝑡 = 𝑑𝑖𝑎𝑔(𝑄𝑡 )𝑄𝑡 𝑑𝑖𝑎𝑔(𝑄𝑡 )
where the parameter constraints 𝛼 and 𝛽 represent non-negative scalars satisfying 𝛼 + 𝛽 < 1 and 𝑄 is the covariance matrix of
standardized residuals 𝜂𝑡 .
9
Table 9
Copulas estimation results in the crisis period for China and G7 countries.
Gaussian
𝜌 0.407 0.383 0.384 0.363 0.320 0.356 0.303 0.344
(0.045) (0.038) (0.043) (0.046) (0.041) (0.04) (0.044) (0.037)
𝐴𝐼𝐶 −88.353 −69.153 −72.045 −69.759 −45.073 −60.316 −42.497 −60.097
Student-t
𝜌 0.407 0.388 0.384 0.363 0.323 0.360 0.303 0.349
(0.045) (0.042) (0.043) (0.046) (0.046) (0.043) (0.045) (0.039)
𝑣 199.993 20.027 199.999 199.999 18.142 25.609 60.538 24.104
(33.289) (16.870) (8.432) (16.067) (13.919) (30.885) (41.663) (27.184)
𝐴𝐼𝐶 −85.500 −69.602 −70.242 −67.745 −46.464 −60.193 −42.195 −57.383
Gumbel
𝜃 1.310 1.318 1.277 1.268 1.241 1.270 1.191 1.248
(0.051) (0.049) (0.044) (0.048) (0.042) (0.044) (0.041) (0.037)
𝐴𝐼𝐶 −71.558 −63.419 −50.174 −58.424 −37.950 −48.683 −29.024 −42.160
Rotated Gumbel
𝜃 1.276 1.266 1.271 1.229 1.207 1.246 1.214 1.249
(0.085) (0.044) (0.059) (0.06) (0.042) (0.044) (0.041) (0.046)
𝐴𝐼𝐶 −61.655 −55.526 −59.425 −47.076 −38.312 −51.838 −41.480 −53.935
Clayton
𝜃 0.170 0.163 0.177 0.147 0.144 0.164 0.158 0.169
(0.022) (0.025) (0.023) (0.021) (0.023) (0.023) (0.025) (0.022)
𝐴𝐼𝐶 −55.291 −46.937 −57.035 −43.369 −36.935 −47.973 −39.825 −53.185
𝜆𝑈 0.223 0.232 0.112 0.198 0.129 0.143 0.044 0.062
(0.062) (0.063) (0.073) (0.062) (0.071) (0.071) (0.050) (0.066)
𝜆𝐿 0.122 0.123 0.189 0.089 0.119 0.156 0.181 0.190
(0.054) (0.061) (0.059) (0.048) (0.053) (0.058) (0.057) (0.057)
AIC −71.371 −62.939 −58.254 −58.107 −41.106 −53.335 −40.568 −51.025
TVP-Gaussian
𝛼 0.022 0.026 0.032 0.020 0.021 0.031 0.001 0.039
(0.011) (0.011) (0.013) (0.011) (0.010) (0.012) (0.113) (0.019)
𝛽 0.949 0.958 0.947 0.947 0.964 0.951 0.022 0.934
(0.019) (0.011) (0.021) (0.022) (0.011) (0.014) (1.385) (0.034)
𝐴𝐼𝐶 −88.158 −76.599 −76.973 −69.100 −49.467 −68.293 −40.018 −66.005
TVP-Student-t
𝛼 0.022 0.027 0.032 0.021 0.020 0.032 0.058 0.019
(0.011) (0.011) (0.013) (0.012) (0.010) (0.013) (3.782) (0.038)
𝛽 0.019 0.957 0.947 0.947 0.965 0.949 0.000 0.935
(0.949) (0.011) (0.021) (0.022) (0.011) (0.014) (121.833) (0.033)
𝑣 199.964 35.719 198.619 199.773 29.995 34.211 145.505 42.994
(55.956) (33.730) (11.107) (6.302) (34.787) (116.599) (1053.41) (42.686)
𝐴𝐼𝐶 −85.722 −75.096 −74.755 −66.760 −48.097 −66.895 −39.465 −64.427
TVP-Gumbel
𝜔 −0.264 −0.191 −0.054 −0.369 −0.183 0.359 −0.660 −0.189
(0.000) (0.728) (0.607) (0.545) (0.110) (0.564) (0.657) (0.437)
𝛽 0.691 0.640 0.602 0.757 0.652 0.379 0.767 −0.659
(0.000) (0.336) (0.136) (0.001) (0.050) (0.012) (0.015) (0.052)
𝛼 −0.018 −0.394 −0.793 −0.304 −0.544 −1.265 0.624 −0.583
(−0.367) (0.278) (1.988) (0.366) (0.117) (0.326) (0.324) (2.053)
𝐴𝐼𝐶 −80.487 −71.263 −66.674 −65.097 −46.484 −62.289 −40.311 −50.933
TVP-Rotated Gumbel
𝜔 2.114 −0.078 −0.213 2.217 2.095 0.262 −0.620 −0.190
(0.000) (0.728) (0.607) (0.545) (0.110) (0.564) (0.657) (0.437)
𝛽 −0.889 0.589 0.672 −1.002 −0.875 0.418 0.779 0.652
(0.000) (0.336) (0.136) (0.001) (0.050) (0.012) (0.015) (0.052)
10
𝛼 −1.713 −0.652 −0.519 −1.925 −2.090 −1.127 0.460 −0.514
(−0.367) (0.278) (1.988) (0.366) (0.117) (0.326) (0.324) (2.053)
𝐴𝐼𝐶 −69.978 −64.651 −69.674 −54.496 −46.369 −62.711 −47.188 −61.973
TVP-Clayton
𝜔 −1.996 −1.932 −2.270 −2.308 −2.451 −1.864 −0.784 −1.294
(0.365) (0.418) (0.329) (0.426) (0.438) (0.362) (0.413) (0.614)
𝛽 −0.672 −0.575 0.424 −0.676 −0.849 −1.037 −1.177 −1.445
(0.452) (0.661) (0.273) (0.447) (0.529) (0.723) (0.921) (0.816)
𝛼 −0.806 −0.611 −0.866 −0.826 −0.814 −0.676 0.166 −0.330
(0.079) (0.157) (0.060) (0.089) (0.141) (0.096) (0.237) (0.333)
𝐴𝐼𝐶 −52.671 −43.830 −55.014 −41.347 −35.493 −46.234 −37.498 −52.736
𝜓0,𝑈 0.170 1.031 −4.735 −0.805 1.505 1.787 −1.169 1.329
(4.011) (5.181) (5.489) (2.463) (1.591) (4.442) (0.530) (0.715)
𝜓1,𝑈 −9.999 −9.999 7.460 −6.863 −9.995 −9.999 3.079 −7.452
(17.873) (20.641) (16.687) (11.090) (8.011) (23.348) (1.436) (4.268)
𝜓2,𝑈 −0.985 −0.980 −0.689 −0.986 0.354 0.552 0.866 0.908
(0.006) (0.031) (0.167) (0.005) (0.189) (1.025) (0.102) (0.040)
𝜓0,𝐿 −0.359 0.545 0.520 0.722 0.443 0.195 −1.138 0.745
(1.118) (0.318) (0.294) (0.284) (2.904) (6.726) (0.668) (1.847)
𝜓1,𝐿 −3.742 −3.228 −2.749 −3.590 −2.806 −9.999 2.635 −9.999
(6.540) (1.902) (1.463) (1.355) (11.354) (22.781) (1.897) (6.864)
𝜓2,𝐿 0.176 0.920 0.911 0.941 0.875 −0.849 0.681 −0.804
(1.203) (0.039) (0.070) (0.019) (0.019) (0.087) (0.154) (0.150)
𝐴𝐼𝐶 −68.019 −66.965 −57.578 −60.401 −40.658 −60.547 −35.943 −54.744
For Archimedean copulas, the evolution path is specified as in Patton (2006):
∑
𝑞
| |
𝜌𝑡 = 𝛬(𝑎 + 𝑏𝜌𝑡−1 + 𝑐 |𝑢𝑡−𝑗 − 𝑣𝑡−𝑗 | ∕𝑞)
| |
𝑖=1
where 𝛬(.) is the modified logistic function, intended to keep the dependence parameter in the domain of definition.
We estimate the parameters of the copula using the inference functions for margins (Joe and Xu, 1996). We first determine the
margin parameters by maximum likelihood method:
∑
𝑛
̂𝑥 = arg max
𝛼 log 𝑓1 (𝑥𝑖 ; 𝛼𝑥 ) (3)
𝛼𝑥 𝑖=1
∑𝑛
̂𝑦 = arg max
𝛼 log 𝑓2 (𝑦𝑖 ; 𝛼𝑦 )
𝛼𝑦 𝑖=1
Next, given estimates 𝛼

̂𝑥 and 𝛼
̂𝑦 , the unknown parameters of the copula 𝜃 are determined as
∑
𝑛
𝜃̂ = arg max log 𝑐(𝐹1 (𝑥𝑖 ; 𝛼𝑥 ), 𝐹2 (𝑦𝑖 ; 𝛼𝑦 ); 𝜃) (4)
𝜃 𝑖=1
This two-step procedure has the advantage to solve the maximization problem in case of high dimensional distributions. Under
the usual regularity conditions, the IFM estimator is asymptotically efficient and normal.
3.3. Marginal models
For the marginal models, we consider an 𝐴𝑅𝑀𝐴(𝑝, 𝑞) specification for the conditional mean and the GJR GARCH model of
Glosten et al. (1993) for the conditional variance. More specifically, the marginal model for each stock market is given by
∑
𝑝 ∑
𝑞
𝑟𝑡 = 𝜙0 + 𝜙𝑗 𝑟𝑡−𝑗 + 𝜃𝑖 𝜀𝑡−𝑖 + 𝜎𝑡 𝑧𝑡 (5)
𝑗=1 𝑖=1
∑
𝑟 ∑
𝑚 ∑
𝑚
𝜎𝑡2 = 𝜔 + 2
𝛽𝑘 𝜎𝑡−𝑘 + 𝛼ℎ 𝜀2𝑡−ℎ + 𝜆ℎ 1𝑡−ℎ 𝜀2𝑡−ℎ
𝑘=1 ℎ=1 ℎ=1
where the disturbance 𝑧𝑡 is a i.i.d random variable with zero mean and unit variance that follows the skewed student-t distribution
of Hansen (1994). The parameter 𝜆 captures asymmetric effects and 1𝑡−ℎ = 1 if 𝜀𝑡−ℎ < 0 and 1𝑡−ℎ = 0 otherwise; it implies that when
𝜆 < 0 bad news will lead to a greater rise in volatility compared to good news.
11
Table 10
Copulas estimation results in the precrisis period for China and G7 sector indices.
Energy Bas. mat. Indust. Cyc.Gds Non- Financials Health. Techn. Telecom. Utilities
Cyc.Gds
Gaussian
𝜌 0.246 0.384 0.387 0.399 0.208 0.338 0.263 0.392 0.251 0.095
(0.021) (0.019) (0.02) (0.019) (0.022) (0.02) (0.021) (0.019) (0.021) (0.023)
𝐴𝐼𝐶 −104.101 −272.367 −274.629 −292.166 −72.846 −202.065 −121.367 −280.216 −110.254 −13.259
Student-t
𝜌 0.249 0.386 0.387 0.399 0.208 0.339 0.263 0.394 0.253 0.088
(0.023) (0.02) (0.02) (0.02) (0.024) (0.021) (0.023) (0.02) (0.023) (0.026)
𝑣 19.459 22.921 78.257 36.870 16.666 25.455 23.714 22.906 20.472 13.012
(9.546) (10.582) (24.223) (32.925) (8.548) (12.993) (13.631) (16.297) (9.712) (4.887)
𝐴𝐼𝐶 −107.980 −275.556 −274.737 −293.272 −77.465 −204.713 −124.175 −283.225 −113.721 −20.000
Gumbel
𝜃 1.165 1.293 1.288 1.297 1.131 1.238 1.173 1.306 1.164 1.058
(0.023) (0.026) (0.026) (0.025) (0.018) (0.022) (0.02) (0.027) (0.019) (0.016)
𝐴𝐼𝐶 −86.078 −235.359 −224.892 −234.597 −58.231 −157.490 −96.584 −243.730 −86.879 −12.504
Rotated Gumbel
𝜃 1.164 1.295 1.292 1.31 1.136 1.249 1.172 1.297 1.17 1.058
(0.02) (0.023) (0.024) (0.025) (0.019) (0.023) (0.021) (0.024) (0.02) (0.016)
𝐴𝐼𝐶 −100.953 −247.410 −246.745 −271.520 −74.150 −192.442 −110.608 −250.446 −106.638 −21.837
Clayton
𝜃 0.126 0.194 0.194 0.205 0.110 0.174 0.131 0.194 0.129 0.053
(0.013) (0.013) (0.013) (0.012) (0.013) (0.013) (0.012) (0.012) (0.013) (0.013)
AIC −93.062 −215.763 −217.378 −243.789 −71.432 −175.049 −103.620 −221.278 −97.056 −17.784
𝜆𝑈 0.059 0.177 0.164 0.153 0.028 0.098 0.069 0.191 0.054 0.000
(0.033) (0.036) (0.036) (0.036) (0.026) (0.036) (0.031) (0.036) (0.031) (0.002)
𝜆𝐿 0.108 0.201 0.206 0.236 0.089 0.191 0.109 0.031 0.112 0.019
(0.030) (0.033) (0.032) (0.030) (0.028) (0.031) (0.029) (0.198) (0.031) (0.020)
AIC −104.646 −260.231 −255.112 −276.152 −76.434 −192.377 −118.409 −266.019 −108.591 −19.053
TVP-Gaussian
𝛼 0.038 0.041 0.018 0.009 0.025 0.032 0.031 0.006 0.014 0.038
(0.040) (0.011) (0.013) (0.004) (0.012) (0.016) (0.026) (0.002) (0.014) (0.020)
𝛽 0.907 0.919 0.975 0.989 0.896 0.901 0.900 0.992 0.863 0.898
(0.149) (0.027) (0.024) (0.006) (0.055) (0.069) (0.125) (0.002) (0.137) (0.078)
𝐴𝐼𝐶 −124.182 −309.777 −314.313 −320.629 −77.974 −213.101 −131.813 −303.006 −109.731 −30.000
TVP-Student-t
𝛼 0.032 0.040 0.018 0.009 0.023 0.033 0.029 0.008 0.013 0.035
(0.035) (0.011) (0.012) (0.004) (0.012) (0.017) (0.038) (0.004) (0.016) (0.016)
𝛽 0.927 0.920 0.976 0.989 0.901 0.903 0.911 0.990 0.851 0.908
(0.120) (0.027) (0.021) (0.006) (0.059) (0.072) (0.178) (0.007) (0.219) (0.059)
𝑣 25.904 68.265 125.732 50.294 18.484 25.600 29.349 32.683 21.597 16.297
(10.556) (41.796) (25.691) (45.778) (9.512) (17.664) (49.380) (28.890) (12.346) (7.814)
𝐴𝐼𝐶 −124.491 −308.139 −312.441 −319.317 −79.783 −213.928 −132.113 −302.034 −110.733 −32.536
TVP-Gumbel
𝜔 2.030 0.632 1.050 1.140 0.650 1.158 1.402 0.899 1.572 −0.024
(0.604) (0.407) (0.612) (0.011) (0.434) (0.621) (0.038) (0.722) (0.556) (0.432)
𝛽 −1.000 0.093 −0.190 −0.247 −0.181 −0.373 −0.569 −0.112 −1.160 0.341
(0.325) (0.728) (0.134) (0.323) (0.116) (0.110) (0.178) (0.123) (0.125) (0.225)
𝛼 −1.626 -0,831 −1.058 −1.093 −0.309 −1.168 −0.806 0.658 −0.327 0.132
(0.118) (0.016) (0.118) (0.051) (0.101) (0.276) (0.011) (0.324) (0.223) (0.011)
𝐴𝐼𝐶 −99.187 −247.978 −234.770 −244.399 −60.710 −162.926 −103.588 −251.673 −91.880 −15.528
12
Cyc.Gds
TVP-Rotated Gumbel
𝜔 2.224 0.649 1.238 1.239 1.300 −1.118 1.445 0.973 −0.556 0.668
(0.601) (0.422) (0.612) (0.611) (0.434) (0.641) (0.048) (0.752) (0.556) (0.432)
𝛽 −1.165 0.083 −0.308 −0.343 −0.701 −0.347 −0.550 −0.253 0.803 −0.234
(0.322) (0.702) (0.134) (0.363) (0.116) (0.110) (0.158) (0.123) (0.125) (0.222)
𝛼 −1.701 -0,843 −1.176 −0.922 −0.483 −0.712 −1.415 −0.409 0.098 −0.606
(0.118) (0.016) (0.118) (0.051) (0.101) (0.276) (0.011) (0.324) (0.223) (0.011)
𝐴𝐼𝐶 −117.810 −260.182 −128.551 −278.798 −76.976 −197.452 −120.483 −253.686 −109.127 −25.508
TVP-Clayton
𝜔 −0.302 −0.045 −0.070 −0.030 −1.288 −0.257 −0.039 −0.364 −1.509 0.098
(0.216) (0.174) (0.125) (0.106) (0.621) (0.178) (0.492) (0.204) (0.421) (0.089)
𝛽 −1.818 −1.150 −1.326 −1.564 −1.771 −0.915 −1.017 −1.088 −0.754 −0.950
(0.649) (0.662) (0.447) (0.436) (0.950) (0.388) (1.161) (0.453) (0.718) (0.396)
𝛼 0.515 0.680 0.619 0.574 0.024 0.589 0.800 0.411 −0.089 0.931
(0.149) (0.290) (0.132) (0.067) (0.286) (0.140) (0.496) (0.197) (0.211) (0.027)
𝐴𝐼𝐶 −102.937 −227.433 −228.703 −260.247 −72.962 −177.567 −109.480 −225.121 −94.758 −19.298
𝜓0,𝑈 0.269 0.119 0.216 0.679 −8.959 −0.292 −0.923 0.912 0.170 −6.003
(0.163) (0.063) (0.834) (1.410) (7.495) (1.754) (2.187) (0.924) (1.592) (1.205)
𝜓1,𝑈 −1.373 −0.584 −6.888 −9.999 8.107 −8.057 −8.725 −9.601 −3.377 −1.033
(0.930) (0.333) (3.607) (10.259) (26.391) (6.725) (10.211) (6.561) (5.747) (3.658)
𝜓2,𝑈 0.964 0.980 −0.142 −0.274 −0.894 −0.160 −0.353 −0.263 0.749 4.328
(0.031) (0.016) (0.247) (0.863) (0.057) (0.299) (0.279) (0.833) (0.558) (0.834)
𝜓0,𝐿 −0.426 0.096 0.244 −0.336 −0.526 −0.724 0.386 −2.497 −0.682 −0.236
(1.453) (0.764) (0.867) (0.585) (1.975) (0.814) (1.226) (1.223) (0.784) (1.195)
𝜓1,𝐿 −9.999 −6.157 −6.084 −2.388 −9.712 −2.439 −9.999 2.765 1.253 −9.999
(5.357) (2.679) (4.120) (2.816) (8.602) (3.568) (4.951) (4.267) (1.583) (9.932)
𝜓2,𝐿 −0.822 −0.439 −0.329 −0.197 −0.573 −0.271 −0.326 −0.742 0.805 0.144
(0.113) (0.505) (0.370) (0.369) (0.151) (0.300) (0.197) (0.118) (0.224) (0.480)
𝐴𝐼𝐶 −110.652 −269.017 −255.249 −275.556 −72.042 −187.737 −118.270 −264.040 −102.854 −14.001
4. Data
We construct our dataset using the MSCI total return indices for China and G7 countries2 on a daily basis from January 2013
to June 2021, thus covering the periods before and during the COVID-19 crisis. The pre-crisis period ran from 1 January, 2013
through 30 December, 2019 and the crisis period from 31 December 2019, when the WHO China Country office reported officially
a cluster of cases of pneumonia in Wuhan, to 09 June, 2021.
Because analyzing the risk spillover at the market level only may mask the potential heterogeneous and asymmetric effects of
the crisis on various sectors (Forbes, 2002 and Tai, 2004), we also collect regional sector price indices for ten sectors (energy,
basic materials, general industrials, cyclical consumer goods, non-cyclical consumer goods, financials, healthcare, technology,
telecommunication services and utilities). These sectors have been categorized following the broad distinction of Thomson Reuters
Business Classification (TRBC). All data are denominated in USD and sourced from DataStream.
The data, plotted in Figs. 1 and 2, show that all indices exhibited bursts at the end of the first quarter of 2020 as the COVID-19
crisis evolves and spreads to other countries. The return series are obtained by using the logarithmic differences of the consecutive
prices expressed in percentage. The Basic characteristics of the data at market and sector levels have been summarized in Table 2
and Table 3, respectively. Panel A of both Tables present the summary statistics on the variables of interest in the pre-crisis period,
and Panel B show similar statistics in the crisis period.
It can be noticed first that all return series showed negative skewness values, except Japan in the second period and the energy
sector in the first period. Second, higher kurtosis values are more pronounced especially in the crisis period. This is consistent
with the existence of fat tails in the return distributions, asymmetry and departure from the normality assumption. The Jarque
Bera test results confirm this conclusion and reject the normality assumption for all return series at the conventional significance
level. Furthermore, the Ljung–Box statistics highlight the presence of serial correlation in return and squared return series in almost
all cases. Also, the ARCH-Lagrange multiplier (ARCH-LM) statistics are significant for all the series in both periods indicating the
presence of ARCH effects. The differences between the maximum and minimum returns show that the range were greater for the
crisis period (except for China) compared to the precrisis period. This suggests a greater probability of large decreases during the
COVID-19 period. Finally, the results of the KPSS stationarity test confirm that all return series were stationary.
2 The G7 countries are: United State, France, Germany, Italy, United of Kingdom and Japan. We do not include neither the period of the US subprime crisis
nor that of the European sovereign debt crisis, since we want to focus on the contagion effects due to COVID-19 epidemic only.
13
Table 11
Copulas estimation results in the crisis period for China and G7 sector indices.
Cyc.Gds
Gaussian
𝜌 0.288 0.364 0.376 0.420 0.262 0.269 0.321 0.405 0.313 0.147
(0.044) (0.036) (0.042) (0.046) (0.04) (0.042) (0.045) (0.046) (0.042) (0.041)
𝐴𝐼𝐶 −40.388 −66.044 −72.966 −94.382 −32.994 −37.205 −49.626 −88.571 −46.381 −9.289
Student-t
𝜌 0.289 0.372 0.376 0.420 0.264 0.274 0.321 0.405 0.313 0.144
(0.046) (0.041) (0.042) (0.046) (0.043) (0.042) (0.045) (0.046) (0.043) (0.05)
𝑣 37.135 15.153 178.832 199.999 39.628 28.730 199.968 199.768 58.460 12.142
(72.473) (8.287) (937.715) (49.865) (150.491) (29.163) (24.489) (4.902) (1497.609) (6.899)
𝐴𝐼𝐶 −39.316 −66.216 −70.916 −92.249 −32.520 −35.784 −48.950 −87.343 −45.444 −12.588
Gumbel
𝜃 1.174 1.293 1.282 1.33 1.157 1.165 1.208 1.318 1.226 1.075
(0.062) (0.041) (0.046) (0.058) (0.037) (0.045) (0.042) (0.058) (0.043) (0.031)
𝐴𝐼𝐶 −24.082 −58.672 −59.370 −83.345 −19.905 −23.244 −32.222 −82.239 −37.137 −4.815
Rotated Gumbel
𝜃 1.199 1.267 1.272 1.288 1.171 1.189 1.217 1.274 1.205 1.100
(0.045) (0.045) (0.041) (0.052) (0.041) (0.042) (0.049) (0.056) (0.041) (0.037)
𝐴𝐼𝐶 −40.531 −59.120 −61.993 −66.906 −30.235 −36.039 −43.571 −65.039 −38.704 −16.075
Clayton
𝜃 0.151 0.172 0.176 0.173 0.132 0.144 0.153 0.169 0.142 0.084
(0.023) (0.024) 0.024() (0.022) (0.023) (0.024) (0.023) (0.022) (0.024) (0.026)
AIC −40.367 −52.852 −54.402 −55.997 −30.247 −34.930 −42.691 −54.229 −35.036 −13.046
𝜆𝑈 0.019 0.173 0.066 0.262 0.024 0.022 0.057 0.258 0.119 0.000
(0.037) (0.078) (0.159) (0.055) (0.039) (0.039) (0.056) (0.054) (0.065) (0.002)
𝜆𝐿 0.171 0.162 0.060 0.119 0.129 0.154 0.164 0.121 0.116 0.077
(0.053) (0.060) (0.171) (0.054) (0.054) (0.057) (0.057) (0.053) (0.056) (0.057)
AIC −38.588 −61.431 −64.689 −83.539 −29.036 −33.692 −42.542 −83.897 −40.705 −13.046
TVP-Gaussian
𝛼 0.024 0.022 0.021 0.017 0.025 0.025 0.024 0.023 0.019 0.037
(0.011) (0.011) (0.011) (0.009) (0.033) (0.011) (0.014) (0.040) (0.014) (0.016)
𝛽 0.959 0.959 0.957 0.966 0.874 0.957 0.937 0.905 0.931 0.909
(0.016) (0.018) (0.014) (0.009) (0.302) (0.015) (0.033) (0.311) (0.037) (0.034)
𝐴𝐼𝐶 −43.372 −68.218 −73.908 −94.304 −32.335 −41.087 −50.242 −86.488 −45.785 −14.065
TVP-Student-t
𝛼 0.025 0.024 0.022 0.017 0.022 0.026 0.024 0.022 0.019 0.035
(0.011) (0.012) (0.010) (0.009) (0.033) (0.012) (0.015) (0.036) (0.014) (0.016)
𝛽 0.958 0.954 0.957 0.965 0.915 0.955 0.937 0.909 0.934 0.916
(0.015) (0.019) (0.017) (0.009) (0.250) (0.015) (0.033) (0.274) (0.033) (0.030)
𝑣 35.691 15.536 116.268 196.02 33.98 37.878 199.384 199.014 58.947 14.616
(40.515) (9.291) (254.666) (46.116) (80.251) (26.711) (9.687) (10.936) (183.011) (10.433)
𝐴𝐼𝐶 −41.905 −68.625 −71.946 −91.929 −31.083 −39.595 −48.151 −84.176 −43.930 −14.264
TVP-Gumbel
𝜔 −0.352 −0.156 −0.235 −0.346 0.030 −0.179 −0.593 −0.171 −0.550 −0.818
(0.002) (0.625) (0.017) (0.022) (0.124) (0.544) (0.042) (0.119) (0.656) (0.053)
𝛽 0.756 0.639 0.682 0.728 0.493 0.665 0.905 0.590 0.869 1.132
(0.014) (0.236) (0.015) (0.014) (0.528) (0.002) (0.265) (0.040) (0.042) (0.093)
𝛼 −0.448 −0.540 −0.465 −0.207 −0.740 −0.676 −0.176 −0.172 −0.157 −0.420
(0.000) (0.060) (0.345) (0.344) (0.226) (0.344) (1.977) (0.001) (1.003) (0.001)
𝐴𝐼𝐶 −33.361 −68.553 −69.590 −88.536 −23.832 −33.060 −35.442 −84.737 −41.504 −10.811
Tables 4 and 5 report the unconditional correlations for return series in both periods. As expected, there is an increase in the
level of correlation between China and all G7 stock markets in the aftermath of the pandemic. The same holds true for sectoral
indices. The highest correlation in the crisis period is observed for the G7 stock market and the cyclical consumer goods sector and
the lowest one is for Japan and the utilities sector.
14
Cyc.Gds
TVP-Rotated Gumbel
𝜔 −0.423 −0.182 0.238 1.965 0.065 −0.361 −0.391 −0.444 −0.541 −0.732
(0.002) (0.635) (0.027) (0.032) (0.134) (0.504) (0.002) (0.109) (0.606) (0.053)
𝛽 0.790 0.655 0.370 −0.806 0.485 0.761 0.790 0.740 0.868 1.033
(0.054) (0.226) (0.025) (0.014) (0.538) (0.022) (0.285) (0.042) (0.032) (0.093)
𝛼 −0.298 −0.547 −0.734 −1.468 −0.779 −0.411 −0.418 0.091 −0.209 −0.289
(0.000) (0.060) (0.345) (0.344) (0.226) (0.344) (1.977) (0.001) (1.003) (0.001)
𝐴𝐼𝐶 −46.844 −68.791 −66.880 −71.541 −36.290 −44.327 −49.661 −67.287 −42.883 −19.784
TVP-Clayton
𝜔 −2.044 −2.293 −2.262 −0.064 −3.150 −1.561 −1.598 −0.178 −3.024 −2.524
(0.718) (0.659) (0.500) (0.049) (0.510) (0.547) (0.382) (0.157) (0.545) (0.700)
𝛽 0.752 0.503 0.015 0.301 0.164 0.694 1.204 −0.211 0.052 2.214
(0.590) (0.883) (0.460) (0.258) (0.383) (0.713) (0.721) (0.630) (0.287) (1.672)
𝛼 −0.377 −0.783 −0.889 1.013 −0.953 0.061 0.082 0.813 −0.981 0.167
(0.614) (0.573) (0.106) (0.008) (0.099) (0.377) (0.176) (0.190) (0.039) (0.277)
𝐴𝐼𝐶 −37.807 −50.778 −50.369 −57.531 −27.959 −31.627 −40.451 −50.292 −33.191 −11.408
𝜓0,𝑈 1.803 −3.010 −0.134 −1.847 0.464 −10.00 −7.182 0.961 −6.300 −9.879
(0.899) (1.965) (0.243) (1.403) (4.087) (365.526) (6307.9) (0.208) (11.399) (8.865)
𝜓1,𝑈 −9.999 0.461 0.318 4.382 −10.00 0.816 9.999 −6.536 4.583 −0.855
(5.338) (5.865) (1.294) (4.848) (12.606) (299.006) (23.42) (4.792) (16.850) (0.618)
𝜓2,𝑈 0.836 −0.993 1.068 −0.087 0.382 −0.995 −0.819 −0.972 −0.995 0.404
(0.051) (0.004) (0.025) (0.352) (0.266) (0.284) (101.5) (0.016) (0.006) (0.491)
𝜓0,𝐿 0.146 0.688 0.344 0.645 0.501 0.793 0.555 −3.852 0.203 0.301
(0.506) (0.462) (1.049) (1.228) (0.809) (1.075) (73.174) (2.077) (0.289) (1.715)
𝜓1,𝐿 −1.024 −4.576 −6.424 −8.205 −4.589 −3.898 −6.121 −2.745 3.835 −1.722
(1.055) (3.172) (3.330) (6.164) (2.540) (5.812) (5.969) (348.7) (6.840) (1.116)
𝜓2,𝐿 0.905 0.673 −0.137 0.137 0.482 0.890 0.883 −0.769 0.868 0.329
(0.262) (0.313) (1.354) (0.441) (0.176) (0.045) (13.360) (0.080) (0.130) (0.185)
𝐴𝐼𝐶 −38.445 −61.785 −79.215 −77.378 −23.962 −37.860 −40.112 −78.968 −39.922 −6.039
5. Results
5.1. Marginal results
In the first step, we estimate by using the maximum likelihood estimation (MLE) method a GJR-GARCH model for the return
data. The Akaike Information Criterion (AIC) is used to select the number of parameters 𝜙 and 𝜃 in the autoregressive and moving
average specifications in Eq. (3). The results reported in Tables 6 and 7 indicate that conditional volatility is past-dependent and
very persistent over time. The Ljunk–Box statistics for serial correlation in the residual and the squared residual models, indicate
that the standardized residuals are approximately i.i.d and confirm the absence of ARCH effects. They are thus far more suitable
to copula estimation than the raw return series. The parameters of the skewed-t distribution are all significant which clearly show
that return series depart from normality and that the probability of extremely negative and positive realizations for our returns is
thus higher than that of a normal distribution.
5.2. Copula results
We considered the potential impact of COVID-19 pandemic on dependence by fitting copula models to GARCH-filtered log-returns
for the precrisis and the crisis period. For each subperiod, we examined the systemic risk of China’s stock market for the G7 stock
market as a whole and for each country belonging to this group. We also examined the systemic risk of China’s stock market for
the major stock sectors in the G7 group.
Table 8 reports the static (Panel A) and time-varying copula (Panel B) model estimation results for China’s stock market paired
with the G7 and with each G7 stock market in the precrisis period. For static copula models, we can observe that the dependence
parameters for all pairs are positive and significant. The time-invariant student-t copula provide the best fit for all pairs, except for
the China–Italy and China–Japan pairs where the SJC-copula performs better according to the AIC corrected for the small sample
bias. China has the highest dependence with UK and the lowest dependence with Japan. Overall, the results for static copula models
show that, irrespective of the assumed copula model, China and the G7 stock markets are linked each others during bearish and
bullish markets, albeit in different magnitude.
This finding could be explained notably by the UK–China Commercial and investment Relationship. In fact, according to Cainey
and Nouwens (2020) Chinese demand is high in most categories where the UK exports or operates such as technology, high-
end consumer products and the services sector, especially education, healthcare and finance. Second, Chinese companies are also
15
Table 12
Downside and upside VaR and CoVaR estimation results in the precrisis and crisis periods for G7 stock returns.
Downside Upside
VaR CoVaR KS test VaR CoVaR KS test
Mean Sd Mean Sd H0 :CoVaR = VaR Mean Sd Mean Sd H0 :CoVaR = VaR
H1 :CoVaR < VaR H1 :CoVaR > VaR
G7 Pre. −1.131 0.541 −1.965 1.022 0.566 1.094 0.484 1.680 0.822 0.496
[0.00] [0.00]
Crisis −1.990 1.969 −3.407 3.340 0.421 1.863 1.762 2.859 2.727 0.360
[0.00] [0.00]
Germany Pre. −1.783 0.536 −3.151 1.096 0.692 1.665 0.490 2.680 0.904 0.624
[0.00] [0.00]
Crisis −2.557 1.590 −4.620 3.510 0.534 2.372 1.452 3.904 2.887 0.479
[0.00] [0.00]
Canada Pre. −1.418 0.527 −2.082 0.786 0.397 1.287 0.462 1.748 0.638 0.333
[0.00] [0.00]
Crisis −2.379 2.435 −4.170 4.821 0.434 2.129 2.135 3.373 3.791 0.384
[0.00] [0.00]
USA Pre. −1.297 0.683 −2.139 1.236 0.497 1.256 0.607 1.826 0.982 0.424
[0.00] [0.00]
Crisis −2.256 2.217 −3.712 3.615 0.368 2.108 1.970 3.096 2.918 0.307
[0.00] [0.00]
Italy Pre. −2.246 0.843 −4.512 1.702 0.819 2.111 0.767 2.615 0.966 0.325
[0.00] [0.00]
Crisis −2.806 2.045 −4.662 4.023 0.460 2.620 1.861 4.002 3.343 0.384
[0.00] [0.00]
France Pre. −1.725 0.669 −2.935 1.339 0.572 1.588 0.596 2.429 1.061 0.484
[0.00] [0.00]
Crisis −2.519 1.868 −4.457 4.011 0.455 2.295 1.663 3.645 3.164 0.386
[0.00] [0.00]
Japan Pre. −1.768 0.652 −3.366 1.233 0.772 1.651 0.592 2.536 0.914 0.602
[0.00] [0.00]
Crisis −1.944 0.881 −3.757 1.705 0.770 1.811 0.800 2.198 0.977 0.373
[0.00] [0.00]
UK Pre. −1.588 0.724 −2.901 1.455 0.723 1.457 0.658 2.423 1.197 0.652
[0.00] [0.00]
Crisis −2.474 1.727 −4.371 3.766 0.479 2.263 1.570 3.655 3.077 0.421
[0.00] [0.00]
Notes: The table displays summary statistics of the VaR and CoVaR for the G7 stock markets in the pre- and crisis period. KS test is the Kolmogorov–Smirnov
bootstrapping test proposed by Abadie (2002) to test the null hypothesis of no systemic impact from China to G7 stock markets. 𝑃 -values are reported in square
brackets.
increasingly present in the UK through acquisition and greenfield operations. Third, China revives Shanghai–London Stock Connect
at a time when as the US threatens to bar Chinese companies from American financial markets. The Shanghai–London Stock Connect
will allow global investors to benefit from China‘s growth through London, while London Stock Exchange listed companies will be
able to access Chinese investors directly.
Several factors could also explain the weak economic dependence between China and Japan. First, since the 2000s, bilateral
political relations have become increasingly conflicted leading to the sharp fall of Japan’s foreign investment in the country. Second,
China’s industrial upgrading and economic development has been accompanied with its decreasing economic dependence on Japan
(for more details on Contemporary China–Japan Relations, see Chiang (2019)).
Looking at the results of Panel B, it is clear that time varying copulas outperform static copula models in all cases, except Japan.
Also, the TV-elliptical copulas (Gaussian and Student-t) offered the best fit in six cases out of eight. This shows that there is symmetric
tail dependence between China paired with each G7 country and in two cases (Italy and Japan) asymmetric tail dependence as given
by the Rotated Gumbel and SJC copula. This also shows that the considered stock markets comove in both extreme positive and
negative returns.
Regarding the crisis period, the copula estimation results reported in Table 9 shows that the dependence characteristics has
changed in both level and structure. In fact, the results for static copula models indicate an increase of the dependence between
China and the G7 stock market. The static Gaussian copula offers the better fit for all countries except Germany and Italy. The
highest dependence is observed for the China–Canada pair and the lowest dependence is for China–Japan pair.
Time-varying symmetric tail independence as given by the TVP-Gaussian copula is the best copula fit for Germany, Canada, Italy,
France and UK stock markets. Thus, our results point out that the Chinese stock market decoupled from G7 stock markets and show
independence at the tails in all cases, except Japan. These findings will have important implications for systemic risk.
In Tables 10 and 11, we report the estimation results for China paired with the G7 sectoral indices in the pre and crisis periods.
Looking first at the results of static copula model in the first period, we can conclude that all sectors indices positively comove with
China’s stock market. The obtained results indicate also that the student-t copula is the best fitting static copula model, providing
16
Fig. 3. Time series plots of downside and upside VaR and CoVaR for G7 stock market returns.
evidence of lower and upper tail dependence in all cases, except for the utilities sector. The highest dependence is observed for the
cyclical goods sector, followed by the technology sector, and the lowest one is detected for the utilities sector.
The evidence provided by the TVP-copula models shows that time-varying dependence offers a better alternative and outperforms
static dependence specification for all pairs, with the exception of the telecommunication sector. According to the AIC, the TVP-
Student-t copula offered the best fit for the energy, non cyclical goods, financials, health and utilities sectors, displaying lower and
upper tail dependence with China.
Regarding the pandemic period, the reported results in Table 11 indicate that China comove more strongly with all G7 sectors,
except the basic materials, industrials and Financials sectors. The TVP-Rotated Gumbel copula provides the best fit for the energy,
basic materials, non cyclical goods and financials sectors, showing strong dependence in the left tail only. The China’s stock market
did not comove with the industrial, cyclical goods, health, technology and telecommunication sectors during extreme market
conditions, as shown by the Gaussian copula.
5.3. Spillover analysis
To gain further insights into the systemic impact of the COVID-19 pandemic and its contagion effects across the G7 stock markets
on the one hand and, on the other hand, across the G7 stock sectors, we compute the CoVaR for each stock markets and sectoral
indices at the 95% confidence level (𝛽 = 5%) conditional on the VaR of the Chinese stock market at the 95% confidence level
(𝛼 = 5%).
Figs. 3 and 4 display the trajectory of the calculated upside–downside VaR and CoVaR over time. It can be seen that CoVaR values
are unstable over all the considered sample period with sharply movements changes during the period of 2015–2016 Chinese stock
market turbulence and also during the US–China trade-war period that starts in July 2018. A more pronounced sudden change is
noticed after the onset of the COVID-19 crisis, when contagion effects of the pandemic spread from China to other countries.
17
Fig. 4. Time series plots of downside and upside VaR and CoVaR for G7 stock market returns.
Table 12 present the summary statistics of the upside–downside VaR and CoVaR for G7 stock returns. Considering downside risk,
the reported results in the left panel confirm the graphical evidence, that is, CoVaR values are significantly smaller than the VaR
values in all cases. This finding is corroborated by the smaller 𝑝-values associated with the Kolmogorov–Smirnov test, suggesting
existence of downside risk spillover effects from China’s stock market to G7 stock markets. Empirical evidence for the pre-crisis
period revealed that Canada and Italy have the highest and smallest mean downside CoVaR, respectively. This indicates that Italy’s
stock market received the highest systemic impact from China’s stock markets. The result was expected since Italy’s economic and
trade relations with China have grown more dynamic in recent years. Moreover, by looking at the G7 average value of downside
CoVaR, we can conclude that the systemic impact of China’s stock market on each G7 stock market taken individually, is greater than
its impact on the whole stock market. Regarding the crisis-period, we observe an increase in all the CoVaR values which confirm
the fact that the systemic risk of China’s stock market becomes on average higher for all G7 stock markets and also for the whole
18
market. Italy still has the smallest mean of downside CoVaR, followed by Germany, France and UK stock markets. This indicates
that during the COVID-19 crisis, these stock markets suffer more severely when China’s stock market is in distress.
These findings can be explained by the strong economic ties these countries have with China and the potential role of trade
as a spreader of shocks through Global Value Chains. Indeed, Germany is the top exporter and second-biggest importer of Chinese
goods within the EU region in 2019. It is also the second largest European investor in China with continued investment across a
range of different industries including automotive, and basic materials. Moreover, Germany is a major European hub for many large
multinational corporations owing, among other factors, to its stable economy, strategic location and highly educated workforce.
Given the importance of value chains in spreading shocks, Germany can act as a “choke points” through which a shock is likely
to propagate and amplify across Europe. Italy is the Chinese fifth largest trading partner in the European region in 2019 and the
first member of the G7 group to join the Belt and Road initiative. The signed accords covered a wide range of domains, including
cooperation between banks and cooperation on the topics of innovation, science and technology. Although the steady development
of China–Italy relations during the last years, Italian companies are lagging far behind Germany in exploiting the advantages offered
by the Chinese market. The main reason for this is that the Italian economy is largely dominated by small and medium-sized firms,
whose capacity to fully exploit the Chinese market is limited (Prodi, 2014). France has recently more consolidated its position as a
driving economic force in the eurozone, especially after the unprecedented exit of the UK. It continues to work closely with China to
enhance economic cooperation through trade and investment. The UK–China trade has also increased considerably during the last
few years, with close cooperation in infrastructure development, education and technology. Since April 2019, the country imports
of goods from Germany, the largest EU trading partners of UK, have declined coinciding with the increased uncertainty surrounding
the impact EU exit had on UK’s international trade. The Brexit will present an opportunity to enhance the current cooperation
between British and Chinese partners by offering more freedom and flexibility in negotiating terms and deals with China.
Overall, we argue that the magnitude of market risk exposure could depends on the country’s degree of openness to international
trade and its capability to diversify the sources of demand and supply across countries (Caselli et al., 2020).
Considering upside risk, the test results presented in the right panel show also that the CoVaR values are significantly greater
than the VaR for each stock market. This is an apparent evidence of upside risk spillover effects from China’s stock market. During
the pre-crisis period, we observe that the risk spillover effects is higher in the case of Germany and Italy, but lower in the case
of Canada stock market. Thus, we can conclude that when China’s stock market shows a bullish trend, this will generate a more
positive effect on Germany and Italy than in Canada stock market. The same conclusion of a positive impact on Italy and Germany
stock markets is confirmed in the crisis period.
In Table 13, we report the summary statistics of the upside–downside VaR and CoVaR for G7 stock sector returns. Once again,
we found clear evidence of downside and upside risk spillover effects from China’s stock market, as confirmed by the KS test results.
Results in the precrisis period provide evidence that the technology sector has the smallest mean downside CoVaR followed by
the energy and basic material sectors. The non-Cyclical goods sector has the highest mean downside CoVaR among all stock sectors
followed by the utilities and telecommunication sectors. This is the evidence that the market risk exposure to China’s stock market
was of most intensity in case of the energy sector and of least intensity in case of the non-Cyclical goods sector. As with stock
markets, our results for the crisis period show that mean downside CoVaR increases during the pandemic and this is highlighted for
all sectors albeit in different magnitudes. Particularly, the downside risk spillover effect becomes more intense in case of the energy
sector, followed by the financials, technology and basic materials sectors.
In terms of upside risk, our analysis indicates that extreme upwards movements in China’s stock market generate positive impact
on energy and technology sectors in both precrisis and crisis periods. The positive impact is more pronounced in the onset of the
COVID-19 pandemic.
To test for asymmetry in risk spillover, we apply the KS test to compare the upside and downside values of CoVaR normalized
by its corresponding VaR. This potential asymmetry may be due to the fact that investors react differently to bad news and good
news. Moreover, it may be also due to the flight to quality or flight to safety effect. Indeed, in times of higher uncertainty and crisis,
investors interest move from riskier investments to purchase the safest possible assets. The estimated results of the KS test, reported
in Tables 14 and 15 show an asymmetric behavior of the upside and downside CoVaR risk spillovers to the G7 stock markets, i.e. the
downside spillovers measured by the normalized CoVaR values were greater than the upside spillovers. A similar result is found
for the G7 stock sector returns. Thus, we can conclude that investors and portfolio managers should design asymmetric hedging
strategies to protect their portfolio against extreme downward movements in China’s stock market.
6. Conclusion
In this paper, we examine the interdependence and risk spillover effects from China to G7 stock markets during the COVID-19
period at both market and sector levels. The results for this study point to several conclusions that can be summarized as follows.
Firstly, we found evidence of positive dependence between China and G7 stock markets that became more pronounced in the
pandemic period. Moreover, the G7 stock markets exhibited symmetric upper and lower tail dependence in the pre-crisis period
and zero tail dependence in the crisis period, with the exception of Japan. Secondly, we reported evidence of downside and upside
spillover effects from China to G7 stock markets, although with different magnitudes across subperiods. Indeed, the magnitude of
upside–downside spillovers was higher from China to Italy’s and Germany’s stock markets, particularly throughout the COVID-19
period.
Similarly, we found that sectors indices positively comove with China’s stock market in both subperiods. The dependence in the
tails differs across G7 stock sectors as these exhibit different levels and structures of bivariate dependence. As for stock markets,
19
Table 13
Downside–upside VaR and CoVaR estimation results in the precrisis and crisis periods for G7 sector indices.
Downside Upside
VaR CoVaR KS test VaR CoVaR KS test
Mean Sd Mean Sd H0 :CoVaR = VaR Mean Sd Mean Sd H0 :CoVaR = VaR
H1 :CoVaR < VaR H1 :CoVaR > VaR
Energy Pre. −1.952 0.860 −2.849 1.252 0.393 1.866 0.815 2.623 1.142 0.360
[0.00] [0.00]
Crisis −3.929 2.818 −7.657 6.012 0.646 3.739 2.671 4.774 3.865 0.265
[0.00] [0.00]
Bas.mat. Pre. −1.469 0.404 −2.380 0.828 0.564 1.350 0.366 2.028 0.681 0.491
[0.00] [0.00]
Crisis −2.297 1.477 −4.628 3.252 0.690 2.100 1.338 2.785 2.073 0.391
[0.00] [0.00]
Indust. Pre. −1.169 0.455 −1.939 0.921 0.538 1.112 0.409 1.664 0.743 0.467
[0.00] [0.00]
Crisis −2.079 1.761 −4.106 3.695 0.585 1.929 1.582 3.004 3.373 0.246
[0.00] [0.00]
Cyc.Gds Pre. −1.176 0.473 −1.941 0.894 0.545 1.075 0.409 1.573 0.683 0.460
[0.00] [0.00]
Crisis −2.121 1.703 −3.593 2.867 0.429 1.892 1.472 2.853 2.233 0.357
[0.00] [0.00]
Non- Pre. −0.976 0.322 −1.421 0.544 0.572 0.976 0.300 1.334 0.478 0.521
Cyc.Gds [0.00] [0.00]
Crisis −1.410 1.182 −2.647 2.424 0.643 1.380 1.101 1.677 1.478 0.278
[0.00] [0.00]
Financials Pre. −1.324 0.602 −2.215 1.164 0.564 1.244 0.546 1.889 0.955 0.489
[0.00] [0.00]
Crisis −2.643 2.438 −5.361 5.500 0.505 2.440 2.211 3.071 3.188 0.145
[0.00] [0.00]
Health Pre. −1.295 0.453 −1.961 0.800 0.491 1.282 0.414 1.788 0.679 0.430
[0.00] [0.00]
Crisis −1.781 1.325 −2.946 2.501 0.437 1.725 1.211 2.615 2.111 0.376
[0.00] [0.00]
Techn. Pre. −1.743 0.696 −2.898 1.352 0.564 1.393 0.607 2.110 1.017 0.472
[0.00] [0.00]
Crisis −2.767 1.991 −4.780 3.476 0.450 2.286 1.737 3.542 2.663 0.352
[0.00] [0.00]
Telecom. Pre. −1.161 0.277 −1.740 0.413 0.815 1.130 0.261 1.611 0.373 0.778
[0.00] [0.00]
Crisis −1.491 0.939 −2.226 1.395 0.608 1.440 0.881 2.049 1.259 0.566
[0.00] [0.00]
Utilities Pre. −1.207 0.272 −1.573 0.518 0.436 1.131 0.240 1.378 0.408 0.359
[0.00] [0.00]
Crisis −2.001 1.651 −3.431 3.156 0.540 1.830 1.454 2.053 1.742 0.175
[0.00] [0.00]
Notes: The table displays summary statistics of the VaR and CoVaR for the G7 sector indices in the pre- and crisis period. KS test is the Kolmogorov–Smirnov
bootstrapping test proposed by Abadie (2002) to test the null hypothesis of no systemic impact from China to G7 sector returns. 𝑃 -values are reported in square
brackets.
Table 14
Asymmetric downside–upside risk spillover effects from China to G7 stock markets returns in the precrisis and crisis periods.
G7 Germany Canada USA
Pre. Crisis Pre. Crisis Pre. Crisis Pre. Crisis
H0 :CoVaR𝑁𝑜𝑟𝑚.
𝐷𝑜𝑤𝑛
= CoVaR𝑁𝑜𝑟𝑚.
𝑈𝑝
0.471 1.00 0.372 0.328 0.410 0.511 0.440 1.00
[0.00] [0.00] [0.00] [0.00] [0.00] [0.00] [0.00] [0.00]
𝐷𝑜𝑤𝑛
> CoVaR𝑁𝑜𝑟𝑚.
𝑈𝑝
Italy France Japan UK

Pre. Crisis Pre. Crisis Pre. Crisis Pre. Crisis
𝐷𝑜𝑤𝑛
𝑈𝑝
1.00 0.331 0.402 0.378 1.00 1.00 0.720 0.291
[0.00] [0.00] [0.00] [0.00] [0.00] [0.00] [0.00] [0.00]
𝐷𝑜𝑤𝑛
𝑈𝑝
Notes: The table displays the results of the Kolmogorov–Smirnov bootstrapping test to investigate the existence of asymmetric downside–upside
risk spillover effect from China to G7 stock markets. 𝑃 -values are reported in square brackets.
20
Table 15
Asymmetric downside–upside risk spillover effects from China to G7 sector returns in the precrisis and crisis periods.
Energy Bas.mat. Indust. Cyc.Gds NonCyc.Gds
Pre. Crisis Pre. Crisis Pre. Crisis Pre. Crisis Pre. Crisis
𝐷𝑜𝑤𝑛
𝑈𝑝
0.153 0.997 0.330 0.998 0.322 0.717 0.440 0.996 0.432 0.971
[0.00] [0.00] [0.00] [0.00] [0.00] [0.00] [0.00] [0.00] [0.00] [0.00]
𝐷𝑜𝑤𝑛
𝑈𝑝
Financials Health. Techn. Telecom. Utilities

Pre. Crisis Pre. Crisis Pre. Crisis Pre. Crisis Pre. Crisis
𝐷𝑜𝑤𝑛
𝑈𝑝
0.457 0.992 0.430 0.574 0.341 0.998 0.997 0.999 0.258 0.998
[0.00] [0.00] [0.00] [0.00] [0.00] [0.00] [0.00] [0.00] [0.00] [0.00]
𝐷𝑜𝑤𝑛
𝑈𝑝
Notes: The table displays the results of the Kolmogorov–Smirnov bootstrapping test to investigate the existence of asymmetric downside–upside risk spillover
effect from China to G7 sector returns. 𝑃 -values are reported in square brackets.
the results for the stock sectors corroborate the observation that suggest downside CoVaR increases throughout the pandemic, and
this is illustrated for all industry sectors. Particularly, we provided evidence of higher upside–downside risk spillover from China
to the energy and technology sectors in both sub periods. In contrast, the telecommunication and non-cyclical goods sectors were
less exposed to the downside tail risk during the COVID-19 period. Overall, our results indicated the existence of an asymmetric
behavior of the upside and downside CoVaR risk spillovers to the G7 stock and sector returns.
In light of these findings, some important theoretical and practical implications for policymakers are given as follow. First,
examining the sensitivity of G7 stock market returns during the COVID-19 period may provide investors with valuable information
about the magnitude and dynamics of downside market movements. Second, it is strategically important for investors to consider
how risks spillovers propagate through sectors and determine which are the less exposed sectors to the information transmission.
Third, it may also provide investors, policy makers and regulators with a valuable objective analysis to carry out portfolio investment
choices, risk control actions and take sound policy steps. This kind of analysis is useful for determining co-movement of G7 stock
returns throughout a variety of time periods spanning from short to long-run investment horizons and intensities. Based on the extent
of returns co-movement, such research may help investors place their investments across multiple investment periods. Finally, an
effective framework of global regulation should be established to prevent financial risk from spreading across borders and to ensure
financial stability within and between countries.
CRediT authorship contribution statement
Riadh Aloui: Conceptualization, Methodology, Investigation, Writing. Sami Ben Jabeur: Writing, Investigation, Editing,
Resources. Salma Mefteh-Wali: Writing, Investigation, Writing & supervision.
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Research in International Business and Finance 62 (2022) 101709

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Research in International Business and Finance

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Tail-risk spillovers from China to G7 stock market returns during the

ARTICLE INFO ABSTRACT

𝜙1 0,048∗∗ 0.081∗ −0.035∗∗∗ 0.041∗∗∗ −0.072∗ −0.060∗ −0.035 −0.147∗ −0.020

𝜙2 0,003 −0.010 −0.002 0.004 0.000 −0.020

𝛼 0.015 0.030∗ 0.000 0.015 0.017 0.011 0.014 0.034∗∗ 0.027

𝛽 0.828∗ 0.879∗ 0.920∗ 0.906∗ 0.804∗ 0.902∗ 0.880∗ 0.848∗ 0.840∗

𝜆 0.258∗ 0.096∗ 0.116∗ 0.126∗ 0.312∗ 0.122∗ 0.164∗ 0.162∗ 0.193∗

Lj 8.772 8.004 12.652 9.827 7.135 12.581 8.489 11.650 15.564

Notes: see Table 6 notes.

3.1. Systemic risk measures

3.2. Dynamic Copula models

Notes: see Table 8 notes.

For Archimedean copulas, the evolution path is specified as in Patton (2006):

Next, given estimates 𝛼

3.3. Marginal models

(continued on next page)

Notes: see Table 8 notes.

(continued on next page)

Notes: see Table 8 notes.

5.1. Marginal results

5.2. Copula results

5.3. Spillover analysis

Italy France Japan UK

Financials Health. Techn. Telecom. Utilities

CRediT authorship contribution statement

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