Spillover effects of crash and jump events: evidence from Chinese market

Abstract

Purpose

This paper aims to investigate the spillover effects of jump and crash events among Chinese nonfinancial firms.

Design/methodology/approach

This sample consists of more than 1.5 million weekly observations of over 3,000 Chinese listed firms over the period 1991–2015. The authors utilize univariate tests to compare the post-event performance of matched peer and non-peer control firms and cross-sectional regressions of their abnormal returns/cumulative abnormal returns (ARs/CARs) and returns on assets (ROAs).

Findings

The authors find that extreme risk-adjusted abnormal stock returns (stock price crashes and jumps) generate statistically significant ARs/CARs in the same directions in industry, size, leverage, and geographical location matched peer firms in Chinese stock market. Further tests reveal that peer firms' response to the crash event is pronounced more in the group of firms about which the information asymmetry is high between investors and firms.

Research limitations/implications

Portfolio investors can adjust their portfolios accordingly by selling stocks of the matching rival firms during a crash period. Policymakers may develop policies so as to protect the interests of small investors in the events of crashes in the markets. They can reduce the information asymmetry between the firms and the investors by making information about the firms more transparent, so as to reduce the contagion in case of crash event.

Practical implications

This study has important implications for portfolio investment managers and policymakers.

Originality/value

To the best of authors' knowledge, this is the first study that combines the jump and crash events and attempts to assess their spillover effects on other firms in Chinese stock market.

Citation

Usman, M., Akhter, W. and Haque, A. (2023), "Spillover effects of crash and jump events: evidence from Chinese market", China Finance Review International, Vol. 13 No. 4, pp. 599-620. https://doi.org/10.1108/CFRI-07-2022-0126