The role of trade policy uncertainty on contemporaneous and lagged connectedness between critical raw materials and high-tech markets: Evidence from China

Abstract

This paper employs a novel R² decomposed connectedness approach to examine the contemporaneous and lagged spillover effects between critical raw materials and high-tech markets in China. It also applies the GJR-GARCH-MIDAS model to assess the influence of trade policy uncertainty on these spillovers. The findings reveal significant return and volatility spillover effects between critical raw materials and high-tech markets in China. Specifically, the contemporaneous spillover effect of returns is markedly stronger than the lagged return connectedness, especially for polysilicon and graphite. Conversely, in terms of volatility, the lagged spillover effect is more pronounced, particularly in the aerospace and new materials sectors. The connectedness network indicates that critical raw materials are primarily spillover sources, while high-tech markets are the main recipients. The dynamic connectedness results show that the spillover effects are time-variant and became notably intensified during the COVID-19 pandemic and the Russia-Ukraine war. Furthermore, trade policy uncertainty exerts a significant and asymmetric impact on these spillovers, affecting contemporaneous return spillovers and lagged volatility spillovers differently, highlighting the diverse influence of policy uncertainty on cross-market relationships over time. These findings offer critical insights for enhancing supply chain stability and fostering the sustainable development of high-tech industries.