Topological data analysis of China’s stock market risks to detect early warning signals

Abstract

This study examines the behaviour of the Shanghai and Shenzhen stock exchanges during the 2015 China stock market crash and the 2020 COVID-19 pandemic. Using topological data analysis (TDA), we investigate whether topological indicators extracted from the Shanghai–Hong Kong (SHHK) and Shenzhen–Hong Kong Stock Connect (SZHK) markets can identify early warning signals of financial stress. The results indicate that TDA captures structural changes associated with both crisis episodes and that interconnected markets provide more informative early warning signals than individual markets. These findings suggest that incorporating cross-market information may improve the monitoring of financial instability.