The relative contribution of political shocks to total spillovers in semiconductor industry

The semiconductor industry is highly sensitive to geopolitics. We consider five political indices, namely, the U.S. – China political relations index, U.S. – China tensions index, U.S. partisan conflict index, China geopolitical risks, and U.S. geopolitical risks. We assess the relative importance of these political shocks in influencing the variation of total spillovers in the semiconductor industry using Generalized Forecast Error Variance Decomposition (GFEVD). We begin by constructing total returns and volatility spillover indices through the Diebold-Yilmaz (DY) connectedness approach. The total spillover indices peak during key periods, including the Global Financial Crisis, China Rare Earth Export Restrictions, the U.S. – China Trade War, Huawei Ban, and U.S. Chips and Science Act. The GFEVD results show that, for the full sample from 2005 to 2024, these political shocks have minimal impact on total spillover variation. However, estimations post-Huawei Ban reveal that U.S. partisan conflicts and U.S. geopolitical risks becomes a key driver of variations of total spillovers index in the semiconductor industry.