Measuring contagion effects between crude oil and Chinese stock market sectors

Abstract

The role of cross-market linkages in the occurrence of tail events in stock and energy markets has not yet been fully understood in the contagion literature. This paper investigates the contagion from oil prices to Chinese stock sectors by considering differences between extreme positive returns and extreme negative returns. We compute time-varying cutoffs by employing a generalized Pareto distribution (GPD) function to estimate excess returns. We then use a multinomial logit (MNL) model to examine the probability of Chinese stock sector co-exceedances associated with oil price exceedances. Our results indicate that, compared to common domestic factors, the contagion between oil price and stock sectors is relatively weak, but never negligible. We argue that faced with volatile oil prices during turbulent periods, the existence of any contagion weakens the benefits of portfolio diversification related to oil and Chinese stock sector investment. Based on our findings, investors holding a portfolio of oil and Chinese sector stocks should pay special attention to the extreme changes in crude oil prices and adopt hedging measures to protect their portfolio from extreme shocks to oil markets.

How COVID-19 drives connectedness among commodity and financial markets: Evidence from TVP-VAR and causality-in-quantiles techniques

“…On the issue of spillover, there has been a high evidence of the presence of spillovers between oil and stock markets. Different studies analyze the spillovers between these markets while noting the level of stock aggregation (see Basher et al, 2018 ; Zhang, 2017 ; Maghyereh et al, 2016 ; Phan et al, 2016 ., 2016, Bouri, 2015 for aggregate stock market level; Narayan and Sharma, 2011 ; Tiwari et al, 2018 ; Hamdi et al, 2019 ; Arouri et al, 2012 ; Fang and Egan, 2018 for sectoral/industrial stock level; Antonakakis et al, 2018 ; Peng et al, 2018 ; Broadstock et al, 2016 for firm level). For instance, through the use of the generalized VAR-GARCH model, Arouri et al (2011b) note the existence of return and volatility spillovers between oil and stock markets in the Gulf Cooperation Council (GCC) countries.…”

“… Basher et al (2018) utilize a structural VAR model to unravel that the oil market transmits shocks to the stock returns of major oil exporting countries. Relating to the oil and stock markets relationship at the sectoral/industrial level, Fang and Egan (2018) , while considering the oil and stock markets nexus for China, show that shocks spillover from oil to stock market differs across sectors. They further suggest that information at the sectoral-level should not be neglected while analyzing the spillovers between these two markets (see also Ma et al, 2019 ; Broadstock and Filis, 2014 ; Zhang and Cao, 2013 ; Degiannakis et al, 2013 ; Narayan and Sharma, 2011 ).…”

Dependence among Energy and Asian Emerging Stocks: A Dynamic Conditional Correlation Approach

“…Aloui, Hammoudeh and Nguyen presented the positive correlation between CEE transition economies and oil price at the time of crisis. In the context of chines market (Wen, Wei & Huang, 2012;Fang &Egan, 2018) provided the evidence for the presence of contagion effect between energy and stock market. Our results further confirm the presence of contagion in chines equity market along with other Asian emerging equity markets.…”

Multi-Time Scale Spillover Effect of International Oil Price Fluctuation on China’s Stock Markets

“…Based on the above analysis, in order to better explore the impact of international oil price fluctuation on China's stock market and the time-varying spillover differences of industry sectors, this paper proposes the following hypotheses: According to existing studies, a long-term co-integration relationship exists between international oil price fluctuation and the benefits and fluctuation of China's stock markets. The general overall spillover effect of oil price changes on China's stock markets is increasing gradually, and the differences and time-varying performances of the influences on different industries are highlighted [6][7][8]. Few investigations have been conducted on the time-varying spillover and tail risk spillover of international oil price fluctuation on overall revenues and the industrial stock price index of those markets according to different fluctuation periods or various time scales.…”