Effect of COVID-19 on risk spillover between fintech and traditional financial industries

Abstract

COVID-19 has affected China's financial markets; accordingly, we investigate the effect of COVID-19 on the risk spillover between fintech and traditional financial industries. Using data from April 25, 2012 to April 22, 2022, which we divide into two parts (before and during the COVID-19 periods), we model the dynamic risk spillover relationship following the DCC-GARCH-BEKK and MMV-MFDFA methods. The results show that: (1) The dynamic relationship between fintech and traditional finance is almost positive most of the time, and the dynamic correlations between fintech and realty (real estate development and operation) are the largest. The dynamic linkage between fintech and traditional finance declines after the COVID-19 outbreak. (2) There exists a risk spillover from fintech to every type of bank before and during the COVID-19 periods. Notably, the risk spillover effect of fintech to large state-owned banks and city commercial banks is the largest separately before and during the COVID-19 periods. Meanwhile, there exist a two-way risk spillover between fintech and almost all other traditional financial industries before and during the COVID-19 periods. (3) Owing to the COVID-19 pandemic, the risk spillover relationship, which is in pairs and in the system become more complex. (4) Regarding the whole system, the correlation in the system is anti-persistent most of the time. Moreover, there are large fluctuations and more complex characteristics during the COVID-19 outbreak. However, the whole system was smooth most of the time before the outbreak of the COVID-19 pandemic.