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The development of financial technology has made financial sub-markets increasingly interconnected, and this interdependence magnifies the instability of financial markets and the possibility of risk. The literature documents the relation of financial sub-markets from time domain, but empirical evidence that effectively identify the patterns of co-movement of multiple financial sub-markets from frequency domain is lacking. This study assesses the dynamic relationship among interest rates, stock prices and exchange rates in China from January 2006 to December 2021 using the Wavelet model. Furthermore, we introduce the TVP-VAR-SV model to study whether the dynamic relationship has changed structurally under the impact of COVID-19. We find the following: 1) with the deepening of the financial market and the improvement of the informatization level, the frequency of risk transmission among financial sub-markets decreases, and the linkage relationship changes from frequent linkage in the medium term to relatively stable linkage relationship in the long term; 2) the relationship between the three variables in short-term fluctuations is more complex, while the relationship between financial variables in long-term fluctuations is more stable; 3) after the outbreak of COVID-19, the positive impact of interest rates and stock prices has brought about a larger range of changes in exchange rate volatility, with a longer impact period and a stronger linkage.

The Dynamic Relationship of China’s Financial Sub-Markets: From the Perspective of Risk and Stability