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Heterogeneous Impacts of International Oil Price Shocks on the Stock Market – Evidence from China

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  • Xiang Zhang
  • Lu Liu

Abstract

This article examines the effects of international oil price shocks on the Chinese stock market with explicitly considering the financialization of oil market. Empirical results based on the threshold structural VAR show that the response of stock returns is heterogeneous across regimes and sectors and depends on the source of oil shocks. Generally, oil price shocks have a larger impact on Chinese stocks in the bear regime than in the bull regime, and such nonlinearity is more pronounced for oil supply shocks and aggregate demand shocks. At the sector level, the nonlinear effects of oil price shocks are particularly obvious in the energy, industrials, and consumer discretionary sectors. Furthermore, oil shocks also affect the probability of the stock market switching between bull and bear regimes. The regime switching behavior acts as an important propagator of oil shocks which can explain the differences in risk premiums among quintiles of oil-beta portfolio returns. Although its direct effect on stock returns is limited, oil market’s financialization may trigger regime shifts in several sectors.

Suggested Citation

  • Xiang Zhang & Lu Liu, 2020. "Heterogeneous Impacts of International Oil Price Shocks on the Stock Market – Evidence from China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 56(12), pages 2749-2771, September.
    • Handle: RePEc:mes:emfitr:v:56:y:2020:i:12:p:2749-2771
    DOI: 10.1080/1540496X.2019.1567263
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    Cited by:

    1. Salisu, Afees A. & Adediran, Idris & Omoke, Philip C. & Tchankam, Jean Paul, 2023. "Gold and tail risks," Resources Policy, Elsevier, vol. 80(C).
    2. Rehman, Mobeen Ur & Vo, Xuan Vinh & McIver, Ron & Kang, Sang Hoon, 2022. "Sensitivity of US sectoral returns to energy commodities under different investment horizons and market conditions," Energy Economics, Elsevier, vol. 108(C).
    3. Chin Chia Liang & Carol Troy & Ellen Rouyer, 2020. "The Stock Price Impact of Domestic and Foreign Economic Policy Uncertainty: Evidence from China," Economics Bulletin, AccessEcon, vol. 40(2), pages 1747-1755.

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