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

ABSTRACTThis 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...