Time Varying Efficiency and Asymmetric Extreme Risk Spillover Effects: Evidence From the Chinese and US Stock Markets

ABSTRACT In this study, we employ the term Adjusted Market Inefficiency Magnitude ( AMIM ) to quantify the efficiency of the Chinese and American stock markets and further use the conditional quantile‐based connectedness approach to investigate the extreme risk spillover between the Chinese and American stock markets under different shock scales. Our results show that the stock markets in China and the United States are efficient for most periods, and the efficiency has time‐varying characteristics. Extreme events have a certain impact on the efficiency. The risk spillover from the US stock market to the Chinese stock market dominates and exhibits time‐varying characteristics. The Chinese stock market has stronger external spillover ability during extreme rises, while the US stock market has stronger external spillover ability during extreme declines. The total spillover index and directional spillover index exhibit a U‐shaped characteristic under different quantiles. The spillover‐out (spillover‐in) level in extreme states is stronger than that in normal states, and the spillover effects in extreme rising and falling states are asymmetric, with a larger total spillover level in extreme falling states. The impact of the COVID‐19 and the Russia‐Ukraine war on extreme risk spillovers between the Chinese and American stock markets is very weak. These findings offer valuable insights for financial regulators in systemic risk mitigation and for investors in strategic asset allocation.