Volatility Spillover Dynamics and Determinants between FinTech and Traditional Financial Industry: Evidence from China

Abstract

We explore the dynamics and determinants of volatility spillover between financial technology (FinTech) and the traditional financial industry (TFI). The total, directional, and net spillover indices are measured, and we further decompose volatility spillovers in a time–frequency framework. Economic fundamentals, risk contagion, and market attention are examined as potential determinants of volatility spillovers. We reveal that the total spillover index is time-varying and exhibits an inverse U-shape between 2017 and 2021. FinTech is a net volatility receiver in most cases, and exported volatility to the TFI during the COVID-19 pandemic. The long-term components are the main driving force of volatility spillovers based on the frequency domain decomposition. Meanwhile, the economic fundamental determinants are the main contributing factors of volatility spillovers, explaining over 60% of total spillover between FinTech and the TFI. The findings remain robust under different settings of forecasting horizons, lag lengths, and proxy of the risk contagion determinant.