Research on Risk Linkage Between Internet Finance and Traditional Financial Markets

This paper explores the market linkage from the two perspectives of the correlation structure and risk contagion between internet finance and traditional finance. Using the time-varying t-Copula-GARCH model, the paper measures the correlation between internet finance and traditional financial markets including stocks, banks, and bonds. It also applies the BP structural breakpoint test to verify and analyze the risk contagion between internet finance and traditional finance. The empirical analysis shows that the return rates of internet finance, stocks, banking, and bond markets exhibit characteristics of “sharp peaks and fat tails.” Comparatively, internet finance and stock markets have stronger linkage, while the linkage with the banking market is weaker, and the bond market is the weakest. The linkage among stock, bond, and banking markets tends to be positive, indicating that the rise of the internet financial market can, to some extent, boost the stock and banking markets. The relevance between the internet financial market and the bond market is weak and unstable. The results of the structural breakpoint test further confirm the evident risk contagion effects among internet finance, stocks, bonds, and banking markets in traditional finance.