Spillovers from oil price uncertainty to Chinese sectoral stock returns: New insights from effective transfer entropy

The effective transfer entropy approach offers a novel perspective for measuring information spillover. This study employs this method to investigate the spillover effects of oil price uncertainty (OPU), proxied by the oil implied volatility index, on Chinese sectoral stock returns. Empirical results reveal significant spillover effects of OPU on sectoral stock returns in China, and OPU is the primary information transmitter across the net spillover network. These spillover effects exhibit prominent time-varying characteristics, often increasing during important unexpected events. We find that economic policy uncertainty and climate policy uncertainty in China amplify and mitigate the OPU spillover effects on sectoral stock returns. Finally, these spillover effects can reduce stock return dispersion due to non-fundamental information, indicating the emergence of herd behavior driven by non-fundamentals. By linking methodological innovation, policy risk factors, and investor behavior, this study sheds light on how OPU shapes sectoral stock returns. The findings inform risk control and sector allocation for investors, and guide policymakers in reducing oil-induced market contagion.