Oil price fluctuation, stock market and macroeconomic fundamentals: Evidence from China before and after the financial crisis

Abstract In this paper we investigate the long-term connections between crude oil futures price and China stock market across the recent financial crisis by using a nonlinear threshold cointegration method within a multivariate framework. Three key macroeconomic fundamentals, i.e., foreign exchange market, domestic economic development and total foreign trade volume in China are used to detect their functions as transmission channels between oil futures market and China stock market. Different from extant literature, our empirical results show that firstly oil futures market has significant impacts on China stock market through both a direct way and an indirect way by the macroeconomic channels. Secondly, there are significant long-term cointegration relationships between crude oil futures price and China stock market even if two structural breaks in this relationship are observed in March 2008 and December 2012, respectively. The long-term connections between them vary dramatically at different market regimes, and are enhanced greatly in recent years with the adjustments in refined oil pricing mechanism and exchange rate regime in China. Finally, we find that, among the three macroeconomic fundamentals, exchange rate market plays the most significant role in transforming the impacts of oil prices on China stock market particularly after the financial crisis.