Can stock market always act as a ‘barometer’ for industrial system? An analysis on the connectedness between production and return spillover networks

This study investigates whether the stock market consistently acts as a 'barometer' for the industrial system by employing the complex networks theory. We propose a network of production spillovers for the system and a network of return spillovers for the market and then calculate network similarity to explore the connectedness between them. We acquire the following discoveries. On the one hand, there is a weak connectedness between the network structure of production spillovers and that of return spillovers, with the former and latter showing 'core-periphery' and 'uniformity' associations, respectively; meanwhile, the effects of production shocks on the system are symmetrical, whereas those of return impacts on the market are asymmetrical, suggesting a weak connectedness between them. These confirm that the 'barometer' function of the market exhibits low effectiveness. On the other hand, the major events with a direct impact on the production of enterprises, e.g. Covid-19, US–China Trade Friction, Bank Liquidity Crisis and Strict Financial Regulatory Policies, lead to an increase in the connectedness between the system and the market; conversely, those causing indirect shocks through financing channels, like Stock Market Crash, result in a decrease. These verify that the 'barometer' function strengthens amidst some major events while weakens during others.