Impacts of the Chinese Capital Market Using the Volatility Index: Comparison Before and After the COVID-19 Pandemic
Authors:   Asia-Europe Perspective Association, Wu Kefu , Park Jiyun 
Published: December 2024

In 2020, the COVID-19 pandemic swept the world, threatening lives and causing panic and chaos in the capital markets. Faced with the impact of COVID-19, markets in China and the US reacted differently to the panic. Panic spread and risk links have been strengthened between the Chinese and US markets.
Faced with the economic trauma caused by COVID-19 and panic among investors in capital markets, the Chinese and US governments have issued a number of policies to combat the economic downturn and market panic. Among them, active fiscal and monetary policies are the main policies. However, in addition to fiscal and monetary policy, China has been focusing on introducing a series of capital opening policies to attract global investment to stabilize capital market sentiment and lead the healthy development of capital markets. Therefore, the panic in the Chinese capital market has deepened against the background of China's capital opening policy and the impact of the corona virus. The development of capital markets, along with the propagation effect of capital flows, is attracting more and more attention from regulators and investors.
Based on the research background of Corona, this paper first classifies the timeline of Corona and summarizes the impact of Corona on the capital markets of China and the United States. Next, we study the propagation effect of the capital market fear index in China and the United States, and further explore the interaction between the capital flow represented by Mainland-Hongkong stock connect and the Chinese fear index through the case study method and the VAR model. Specifically, this thesis is divided into three major parts. The first is to summarize the corona trend in China and the United States, policy measures for corona prevention and control, and economic impact. Second, through the VAR model, we study the mutual influence of the panic effect of the Chinese and US capital markets under the background of the coronavirus. Third, we analyze the effect of the level of net capital inflows on the fear index and the difference between before and after Corona.
According to the research results of this paper, first, the main reason for the large difference in the impact of the corona virus in China and the United States is that there is a big difference in the attitudes and measures of the two governments to deal with the corona virus. The impact of the corona virus on the macro economy is clear. The strength of corona prevention and control is a key factor, and the higher the short-term intensity of corona prevention and control, the smaller the long-term impact of the corona on the economy. Second, after the outbreak of corona, the mutual influence of the panic between China and the United States increased. Specifically, in the early stages of the outbreak, the fear index of the Chinese market had a great impact on the fear index of the US market. After the corona virus outbreak in the United States, the Chinese stock market has clearly been affected by the US fear index, and the degree of interaction between the two markets is related to the severity of the corona virus in the host country. Third, the scale of capital flow measured by the net inflow of Shanghai-Hongkong stock connect and Shenzhen-Hongkong stock connect has a negative correlation with the fear index. In other words, capital flows help restore market rationality and reduce the impact of market panics.
The research problem of this paper is timely and innovative, and the research method is relatively rich, so it has some theoretical significance by enriching the literature results in this research field to some extent. Also, for regulators and investors, this study has practical significance as it helps to understand the reality of how capital flows affect capital markets in a large-scale epidemic situation and provides theoretical support for the proposed response policies.