Abstract: As the rapid expansion of derivatives markets, institutional investors are trading frequently between iron ore and stock markets, and fast capital flows raise the possibility of risk spillover among markets. This paper is the first to study the bilateral risk spillover effect by identifying multiple bubbles and contagion relationship between iron ore and stock markets based on the new recursive evolving test. Three key findings are obtained. First, there are multiple bubbles in both markets, and the formation of bubble is highly associated with market liquidity and investor’s expectation. Second, risk spillover relations are time-varying, and there have been a bilateral contagion effect of bubbles among markets during the post-COVID-19 era, reflecting the financialization of iron ore market. Third, the direction of contagion is from iron ore to China’s stock market and the reverse direction for second, meaning that the substitution effect has already transformed to linkage effect with the development of iron ore future market. To offset investment risk, investors can add low-correlation assets to construct portfolios, and portfolio diversification strategies must be time-varying.

Keywords: Multiple bubbles; Risk spillover; Time-varying contagion effect; BSADF; Recursive evolving test

JEL codes: G01, O13, Q31

DOI: ...