Can fourth industrial revolution assets provide diversification benefits for traditional sectoral stocks? Evidence from China

Abstract

This study examines the connectedness between the Fourth Industrial Revolution assets and traditional sectoral stocks in China to determine whether there exist diversification benefits. This is conducted from a systemic perspective using the quantile time-frequency connectedness approach. The results demonstrate that, in the short term, financial technology stocks, artificial intelligence stocks, and quantum communication stocks can barely provide diversification benefits for traditional sectoral stocks, especially under extreme market scenarios. However, in the long term, the Fourth Industrial Revolution assets can provide diversification benefits for all traditional stocks under normal, bearish, and bullish market scenarios. Furthermore, the COVID-19 pandemic and the Russia-Ukraine conflict would significantly intensify the connectedness and thus reduce the diversification benefits provided by the Fourth Industrial Revolution assets. Finally, the minimum connectedness portfolio analysis indicates that financial technology stocks provide the largest hedge effectiveness in all cases. These findings have important implications for investors and policymakers.