Identifying Higher-Order Moment Risk Contagion Between the US Dollar Exchange Rate and China’s Major Asset Classes

This study explores the risk nexus between the US dollar (USD) market and China’s major financial assets through a co-higher-order testing framework with market regime switching. Specifically, we utilize robust statistical measures such as co-skewness, co-kurtosis, and co-volatility to investigate the connectedness between the US dollar index and a variety of representative financial products in China, including A-shares, the RMB (Chinese Yuan) exchange rate, government bonds with various maturities, and money markets, during the period from 1 January 2010 to 30 June 2023. The empirical results provide evidence of the existence of financial contagion during market regime shifts and also reveal various patterns of cross-market interconnection paths, particularly concerning the third and fourth moment channels. This suggests that the transmission of asymmetric risk and extreme risk, as described in our model, is indeed in place. Furthermore, we discuss practical implications for investors and market regulators in terms of investment decisions and policy coordination.