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In this paper, we investigate the effect of the U.S.--China trade war onstock markets from a financial contagion perspective, based on high-frequencyfinancial data. Specifically, to account for risk contagion between the U.S.and China stock markets, we develop a novel jump-diffusion process. Forexample, we consider three channels for volatility contagion--such asintegrated volatility, positive jump variation, and negative jumpvariation--and each stock market is able to affect the other stock market as anovernight risk factor. We develop a quasi-maximum likelihood estimator formodel parameters and establish its asymptotic properties. Furthermore, toidentify contagion channels and test the existence of a structural break, wepropose hypothesis test procedures. From the empirical study, we find evidenceof financial contagion from the U.S. to China and evidence that the riskcontagion channel has changed from integrated volatility to negative jumpvariation.

Effect of the U.S.--China Trade War on Stock Markets: A Financial Contagion Perspective