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Relationships between oil price shocks and stock market: an empirical analysis from Greater China

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  • Chu-Chia Lin
  • Chung-Rou Fang
  • Hui-Pei Cheng

Abstract

Although a lot of empirical research has studied the relationship between changes in oil price and economic activity, it is surprising that little research has been conducted on the relationship between oil price shocks and the Greater China region (China, Hong Kong and Taiwan). Therefore, the main goal of this article is to apply detailed monthly data from 1997/7 to 2008/9 to fill this gap. Compared to the effect of US stock market returns described by Kilian (2009) and Kilian and Park (2009), we found that the impact of oil price shocks on stock prices in Greater China has been mixed. First, the impact of oil price shocks on Taiwan's stock market is very similar to that on the US stock market. Additionally, all three shocks have had significantly positive impacts on Hong Kong's stocks, partially in contrast to the effects on the US stock market. However, in contrast to the effect in the US stock market, we found that only global oil supply shock has a significantly positive impact on China's stock returns, but global oil demand shock and the oil specific demand shock have no significant impacts. The reason for the lack of significant impacts is that the positive expectation effect of China's fast economic growth may be just offset by the negative effect of a precautionary demand-driven effect. This result is also consistent with the previous empirical findings that the segmented and integrated China stock market is mixed, and it implies that the China stock market is ‘partially integrated’ with the other stock markets and oil price shocks.

Suggested Citation

  • Chu-Chia Lin & Chung-Rou Fang & Hui-Pei Cheng, 2010. "Relationships between oil price shocks and stock market: an empirical analysis from Greater China," China Economic Journal, Taylor & Francis Journals, vol. 3(3), pages 241-254.
    • Handle: RePEc:taf:rcejxx:v:3:y:2010:i:3:p:241-254
    DOI: 10.1080/17538963.2010.562031
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    Cited by:

    1. Rehman, Mobeen Ur & Nautiyal, Neeraj & Vo, Xuan Vinh & Ghardallou, Wafa & Kang, Sang Hoon, 2023. "Is the impact of oil shocks more pronounced during extreme market conditions?," Resources Policy, Elsevier, vol. 85(PA).

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