IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v80y2019icp995-1009.html
   My bibliography  Save this article

Volatility spillovers between crude oil and Chinese sectoral equity markets: Evidence from a frequency dynamics perspective

Author

Listed:
  • Wang, Xunxiao
  • Wang, Yudong

Abstract

We examine the frequency dynamics of volatility spillovers between crude oil and China's stock markets in a spectral representation framework of generalized forecast error variance decomposition using sectoral stock indices data. We find evidence of total volatility spillover driven mainly by short-term spillovers. The net spillovers of the oil market are almost all positive and dominated by short-ter.m components, although the spillover during China's 2015 financial crisis is negative and attributable to long-term components. In addition, there exists heterogeneity in net pairwise (frequency) spillovers between the oil and sectoral stock markets. Moreover, structural breaks in volatilities appear to be a significant feature of volatility spillovers. Finally, frequency spillovers in our system can predict future stock market volatility. These results have economic implications for investors and policymakers.

Suggested Citation

  • Wang, Xunxiao & Wang, Yudong, 2019. "Volatility spillovers between crude oil and Chinese sectoral equity markets: Evidence from a frequency dynamics perspective," Energy Economics, Elsevier, vol. 80(C), pages 995-1009.
  • Handle: RePEc:eee:eneeco:v:80:y:2019:i:c:p:995-1009
    DOI: 10.1016/j.eneco.2019.02.019
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988319300787
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Jozef Baruník, Evzen Kocenda and Lukáa Vácha, 2015. "Volatility Spillovers Across Petroleum Markets," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    2. Diebold, Francis X. & Yilmaz, Kamil, 2012. "Better to give than to receive: Predictive directional measurement of volatility spillovers," International Journal of Forecasting, Elsevier, vol. 28(1), pages 57-66.
    3. Li, Su-Fang & Zhu, Hui-Ming & Yu, Keming, 2012. "Oil prices and stock market in China: A sector analysis using panel cointegration with multiple breaks," Energy Economics, Elsevier, vol. 34(6), pages 1951-1958.
    4. Po-Kai Huang, 2012. "Volatility transmission across stock index futures when there are structural changes in return variance," Applied Financial Economics, Taylor & Francis Journals, vol. 22(19), pages 1603-1613, October.
    5. Caporale, Guglielmo Maria & Menla Ali, Faek & Spagnolo, Nicola, 2015. "Oil price uncertainty and sectoral stock returns in China: A time-varying approach," China Economic Review, Elsevier, vol. 34(C), pages 311-321.
    6. FrancisX. Diebold & Kamil Yilmaz, 2009. "Measuring Financial Asset Return and Volatility Spillovers, with Application to Global Equity Markets," Economic Journal, Royal Economic Society, vol. 119(534), pages 158-171, January.
    7. Malik, Farooq & Ewing, Bradley T., 2009. "Volatility transmission between oil prices and equity sector returns," International Review of Financial Analysis, Elsevier, vol. 18(3), pages 95-100, June.
    8. Wang, Xunxiao & Wu, Chongfeng, 2018. "Asymmetric volatility spillovers between crude oil and international financial markets," Energy Economics, Elsevier, vol. 74(C), pages 592-604.
    9. Ling, Shiqing & McAleer, Michael, 2003. "Asymptotic Theory For A Vector Arma-Garch Model," Econometric Theory, Cambridge University Press, vol. 19(2), pages 280-310, April.
    10. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(1), pages 122-150, February.
    11. Diebold, Francis X. & Yılmaz, Kamil, 2014. "On the network topology of variance decompositions: Measuring the connectedness of financial firms," Journal of Econometrics, Elsevier, vol. 182(1), pages 119-134.
    12. Zhang, Yue-Jun & Chevallier, Julien & Guesmi, Khaled, 2017. "“De-financialization” of commodities? Evidence from stock, crude oil and natural gas markets," Energy Economics, Elsevier, vol. 68(C), pages 228-239.
    13. Awartani, Basel & Maghyereh, Aktham Issa, 2013. "Dynamic spillovers between oil and stock markets in the Gulf Cooperation Council Countries," Energy Economics, Elsevier, vol. 36(C), pages 28-42.
    14. Creti, Anna & Joëts, Marc & Mignon, Valérie, 2013. "On the links between stock and commodity markets' volatility," Energy Economics, Elsevier, vol. 37(C), pages 16-28.
    15. Phan, Dinh Hoang Bach & Sharma, Susan Sunila & Narayan, Paresh Kumar, 2016. "Intraday volatility interaction between the crude oil and equity markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 40(C), pages 1-13.
    16. You, Wanhai & Guo, Yawei & Zhu, Huiming & Tang, Yong, 2017. "Oil price shocks, economic policy uncertainty and industry stock returns in China: Asymmetric effects with quantile regression," Energy Economics, Elsevier, vol. 68(C), pages 1-18.
    17. Cong, Rong-Gang & Wei, Yi-Ming & Jiao, Jian-Lin & Fan, Ying, 2008. "Relationships between oil price shocks and stock market: An empirical analysis from China," Energy Policy, Elsevier, vol. 36(9), pages 3544-3553, September.
    18. Haddow, Abigail & Hare, Chris & Hooley, John & Shakir, Tamarah, 2013. "Macroeconomic uncertainty: what is it, how can we measure it and why does it matter?," Bank of England Quarterly Bulletin, Bank of England, vol. 53(2), pages 100-109.
    19. Wen, Xiaoqian & Bouri, Elie & Roubaud, David, 2018. "Does oil product pricing reform increase returns and uncertainty in the Chinese stock market?," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 23-30.
    20. Tiwari, Aviral Kumar & Jena, Sangram Keshari & Mitra, Amarnath & Yoon, Seong-Min, 2018. "Impact of oil price risk on sectoral equity markets: Implications on portfolio management," Energy Economics, Elsevier, vol. 72(C), pages 120-134.
    21. Zhu, Huiming & Guo, Yawei & You, Wanhai & Xu, Yaqin, 2016. "The heterogeneity dependence between crude oil price changes and industry stock market returns in China: Evidence from a quantile regression approach," Energy Economics, Elsevier, vol. 55(C), pages 30-41.
    22. Chang, Chia-Lin & McAleer, Michael & Tansuchat, Roengchai, 2013. "Conditional correlations and volatility spillovers between crude oil and stock index returns," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 116-138.
    23. Ewing, Bradley T. & Malik, Farooq, 2016. "Volatility spillovers between oil prices and the stock market under structural breaks," Global Finance Journal, Elsevier, vol. 29(C), pages 12-23.
    24. Choi, Kyongwook & Yu, Wei-Choun & Zivot, Eric, 2010. "Long memory versus structural breaks in modeling and forecasting realized volatility," Journal of International Money and Finance, Elsevier, vol. 29(5), pages 857-875, September.
    25. repec:dau:papers:123456789/14980 is not listed on IDEAS
    26. Malik, Farooq & Hammoudeh, Shawkat, 2007. "Shock and volatility transmission in the oil, US and Gulf equity markets," International Review of Economics & Finance, Elsevier, vol. 16(3), pages 357-368.
    27. Granger, Clive W. J. & Hyung, Namwon, 2004. "Occasional structural breaks and long memory with an application to the S&P 500 absolute stock returns," Journal of Empirical Finance, Elsevier, vol. 11(3), pages 399-421, June.
    28. Wei, Yanfeng & Guo, Xiaoying, 2017. "Oil price shocks and China's stock market," Energy, Elsevier, vol. 140(P1), pages 185-197.
    29. Sadorsky, Perry, 2012. "Correlations and volatility spillovers between oil prices and the stock prices of clean energy and technology companies," Energy Economics, Elsevier, vol. 34(1), pages 248-255.
    30. Li, Lei & Yin, Libo & Zhou, Yimin, 2016. "Exogenous shocks and the spillover effects between uncertainty and oil price," Energy Economics, Elsevier, vol. 54(C), pages 224-234.
    31. Broadstock, David C. & Cao, Hong & Zhang, Dayong, 2012. "Oil shocks and their impact on energy related stocks in China," Energy Economics, Elsevier, vol. 34(6), pages 1888-1895.
    32. Sassan Alizadeh & Michael W. Brandt & Francis X. Diebold, 2002. "Range-Based Estimation of Stochastic Volatility Models," Journal of Finance, American Finance Association, vol. 57(3), pages 1047-1091, June.
    33. Ian Dew-Becker & Stefano Giglio, 2016. "Asset Pricing in the Frequency Domain: Theory and Empirics," Review of Financial Studies, Society for Financial Studies, vol. 29(8), pages 2029-2068.
    34. Bouri, Elie & Awartani, Basel & Maghyereh, Aktham, 2016. "Crude oil prices and sectoral stock returns in Jordan around the Arab uprisings of 2010," Energy Economics, Elsevier, vol. 56(C), pages 205-214.
    35. Wang, Xiao & Zhang, Chuanguo, 2014. "The impacts of global oil price shocks on China׳s fundamental industries," Energy Policy, Elsevier, vol. 68(C), pages 394-402.
    36. Wen, Fenghua & Gong, Xu & Cai, Shenghua, 2016. "Forecasting the volatility of crude oil futures using HAR-type models with structural breaks," Energy Economics, Elsevier, vol. 59(C), pages 400-413.
    37. Zhang, Chuanguo & Chen, Xiaoqing, 2014. "The impact of global oil price shocks on China’s bulk commodity markets and fundamental industries," Energy Policy, Elsevier, vol. 66(C), pages 32-41.
    38. Evan J. McSweeney & Andrew C. Worthington, 2008. "A comparative analysis of oil as a risk factor in Australian industry stock returns, 1980-2006," Studies in Economics and Finance, Emerald Group Publishing, vol. 25(2), pages 131-145, June.
    39. Granger, Clive W. J. & Ding, Zhuanxin, 1996. "Varieties of long memory models," Journal of Econometrics, Elsevier, vol. 73(1), pages 61-77, July.
    40. Nathan S. Balke & Mark E. Wohar, 2002. "Low-Frequency Movements in Stock Prices: A State-Space Decomposition," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 649-667, November.
    41. Choi, Kyongwook & Zivot, Eric, 2007. "Long memory and structural changes in the forward discount: An empirical investigation," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 342-363, April.
    42. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    43. El Hedi Arouri, Mohamed & Jouini, Jamel & Nguyen, Duc Khuong, 2011. "Volatility spillovers between oil prices and stock sector returns: Implications for portfolio management," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1387-1405.
    44. Cătălin Stărică & Clive Granger, 2005. "Nonstationarities in Stock Returns," The Review of Economics and Statistics, MIT Press, vol. 87(3), pages 503-522, August.
    45. Broadstock, David C. & Filis, George, 2014. "Oil price shocks and stock market returns: New evidence from the United States and China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 417-433.
    46. Arouri, Mohamed El Hedi & Jouini, Jamel & Nguyen, Duc Khuong, 2012. "On the impacts of oil price fluctuations on European equity markets: Volatility spillover and hedging effectiveness," Energy Economics, Elsevier, vol. 34(2), pages 611-617.
    47. Kayalar, Derya Ezgi & Küçüközmen, C. Coşkun & Selcuk-Kestel, A. Sevtap, 2017. "The impact of crude oil prices on financial market indicators: copula approach," Energy Economics, Elsevier, vol. 61(C), pages 162-173.
    48. Ferrer, Román & Shahzad, Syed Jawad Hussain & López, Raquel & Jareño, Francisco, 2018. "Time and frequency dynamics of connectedness between renewable energy stocks and crude oil prices," Energy Economics, Elsevier, vol. 76(C), pages 1-20.
    49. Bouri, Elie & Chen, Qian & Lien, Donald & Lv, Xin, 2017. "Causality between oil prices and the stock market in China: The relevance of the reformed oil product pricing mechanism," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 34-48.
    50. William J. Burns & Ellen Peters & Paul Slovic, 2012. "Risk Perception and the Economic Crisis: A Longitudinal Study of the Trajectory of Perceived Risk," Risk Analysis, John Wiley & Sons, vol. 32(4), pages 659-677, April.
    51. Fulvio Ortu & Andrea Tamoni & Claudio Tebaldi, 2013. "Long-Run Risk and the Persistence of Consumption Shocks," Review of Financial Studies, Society for Financial Studies, vol. 26(11), pages 2876-2915.
    52. Maghyereh, Aktham I. & Awartani, Basel & Bouri, Elie, 2016. "The directional volatility connectedness between crude oil and equity markets: New evidence from implied volatility indexes," Energy Economics, Elsevier, vol. 57(C), pages 78-93.
    53. Bai, Shuming & Koong, Kai S., 2018. "Oil prices, stock returns, and exchange rates: Empirical evidence from China and the United States," The North American Journal of Economics and Finance, Elsevier, vol. 44(C), pages 12-33.
    54. Khalfaoui, R. & Boutahar, M. & Boubaker, H., 2015. "Analyzing volatility spillovers and hedging between oil and stock markets: Evidence from wavelet analysis," Energy Economics, Elsevier, vol. 49(C), pages 540-549.
    55. Du, Limin & He, Yanan, 2015. "Extreme risk spillovers between crude oil and stock markets," Energy Economics, Elsevier, vol. 51(C), pages 455-465.
    56. Roger D. Huang & Ronald W. Masulis & Hans R. Stoll, 1996. "Energy shocks and financial markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(1), pages 1-27, February.
    57. Ciner Cetin, 2001. "Energy Shocks and Financial Markets: Nonlinear Linkages," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 5(3), pages 1-11, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Balcilar, Mehmet & Ozdemir, Zeynel Abidin & Ozdemir, Huseyin & Wohar, Mark E., 2020. "Transmission of US and EU Economic Policy Uncertainty Shock to Asian Economies in Bad and Good Times," IZA Discussion Papers 13274, Institute of Labor Economics (IZA).
    2. Ngo Thai Hung, 2020. "Analysis of the Time-frequency Connectedness between Gold Prices, Oil Prices and Hungarian Financial Markets," International Journal of Energy Economics and Policy, Econjournals, vol. 10(4), pages 51-59.
    3. Wei-Zhen Li & Jin-Rui Zhai & Zhi-Qiang Jiang & Gang-Jin Wang & Wei-Xing Zhou, 2020. "Predicting tail events in a RIA-EVT-Copula framework," Papers 2004.03190, arXiv.org, revised Apr 2020.
    4. Xia, Tongshui & Yao, Chen-Xi & Geng, Jiang-Bo, 2020. "Dynamic and frequency-domain spillover among economic policy uncertainty, stock and housing markets in China," International Review of Financial Analysis, Elsevier, vol. 67(C).
    5. Nguyen, Duc Khuong & Sensoy, Ahmet & Sousa, Ricardo M. & Salah Uddin, Gazi, 2020. "U.S. equity and commodity futures markets: Hedging or financialization?," Energy Economics, Elsevier, vol. 86(C).
    6. Tiantian Liu & Shigeyuki Hamori, 2020. "Spillovers to Renewable Energy Stocks in the US and Europe: Are They Different?," Energies, MDPI, Open Access Journal, vol. 13(12), pages 1-28, June.
    7. Ying-Ying Shen & Zhi-Qiang Jiang & Jun-Chao Ma & Gang-Jin Wang & Wei-Xing Zhou, 2020. "Sector connectedness in the Chinese stock markets," Papers 2002.09097, arXiv.org.
    8. Ma, Yan-Ran & Zhang, Dayong & Ji, Qiang & Pan, Jiaofeng, 2019. "Spillovers between oil and stock returns in the US energy sector: Does idiosyncratic information matter?," Energy Economics, Elsevier, vol. 81(C), pages 536-544.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:80:y:2019:i:c:p:995-1009. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Haili He). General contact details of provider: http://www.elsevier.com/locate/eneco .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.