The Impacts Of International Oil Shocks On Chinese Stock Market

As an important kind of energy, oil is much more efficient and cleaner than the traditional energy, such as coal. It is more and more crucial in the process of Chinese economic development. However, because of the limited supply of oil, China became an oil importer in1993, and now the proportion of imported oil to domestic total oil consumption is close to60%. According to the BP statistical review of world energy, the oil importing proportion will grows to80%in2030, which is too high to keep China's energy system safety. At the same time, on one hand, world crude oil prices increased from25.51dollar per barrel in January2000to107.87in December2011, and the volatility of oil prices changes is much bigger than before; On the other hand, the oil pricing mechanism in China is becoming more and more market-driven. Both the scholar and government begin to pay more attention to the impact of crude oil price shocks on China's macro-economy. On the contrary, there is only a few papers have investigated the relationship of oil price shocks and Chinese stock market. Taking this situation and the importance of stock market to the development of economy into consideration, in this paper, we exam the effect of oil price shocks on stock returns through industry levels. We also test whether and how do the macro-economic variables and household consumption play a role in it.Firstly, we analyze the relationship between world oil price shocks and China's energy related stocks return by adopting time varying conditional correlation and asset pricing models. Our empirical results demonstrated that international oil price changes are correlated with energy related stock returns in China, but in a time varying way. There is a clear sharp increase in the conditional correlation after mid2008, which corresponds to the onset of the financial tsunami. A higher return in energy related stocks might reflect that the market requires compensation for increased risks; therefore, we test the hypothesis that oil price changes are one type of systematic risk. A general market model and also the Fama-French three factor model are borrowed from the finance literature to investigate this hypothesis. When a structural break is incorporated, sub-sample analysis shows that oil prices are important in the period following the financial crisis. These results persisted for three sub-indices, and it was further shown that new-energy stocks are more resilient to oil price shocks than other energy sub-indices.Secondly, we use the Dynamic Conditional Correlation GARCH model and Factor Analysis to discuss how international crude oil prices shock is related to Chinese industrial stock returns. Our results show that the correlations between oil price and Chinese stock market are time varying and different cross sectors. Furthermore, we demonstrate that common factors explain most of the variation in stock returns and collaborative change across different stock sectors, and it is an important channel that world oil price influences Chinese stock market.What's more, we examine the relationship between international oil shocks and sectoral stock returns in the Chinese stock market by using factors regression model. Our empirical results show that International oil shocks seem to have a strong effect on sectoral stock returns in China, as eight out of thirteen of these sectors have a significant and positive sensitivity to the shocks. These sensitivities vary across sectors. The mining industry is the most sensitive followed by general industry and manufacturing industry. The financial industry has the only negative coefficient, and it is not significant. There is no clear evidence of asymmetries in China's sectoral stock-oil relationship.Thirdly, taking the facts that the oil shocks impact Chinese stock return differently from the developed markets and that several papers find there exists positive relationship between oil shocks and China's economic development into consideration, we explore whether and how the macro-economic variables function in the relationship of oil price shocks and stock returns. In the long run, we find that crude oil prices and China's GDP have asymmetric relationship; the cointegration coefficient is more significant and larger when oil prices increase. And the macro-economy and stock return is also cointegrated after controlling the breakpoint. In the short run, the impulse response function shows that oil shocks have effect on inflation and GDP growth rate, and the later two variables have significant positive impact on stock returns. Since household consumption has some connection with stock market in the respect of investor behavior, we test the influence of oil price shocks have upon residential consumption in China lastly. The empirical results show that oil shocks do have negative effect on average aggregate consumption. Furthermore, we demonstrate that the most immediate and direct effect passes through transport consumption, as might be expected, but also that significant effects pass through other sectors with less immediacy, including'food and clothes','medicine'and general'living expenditure'. Given the results, particularly observed asymmetries with respect to rises in international oil prices, it seems that residents will adjust the structure of their consume expenditure. Besides, we find that oil price shocks have influence on the trend deviation of consumption-income and wealth (i.e. log consumption-aggregate wealth ratio). In the second step, we investigate whether consumption can predict the stock return. It is fond that household consumption changes have negative effect on the return of Shanghai composite index, while the log consumption-aggregate wealth ratio has significant impact on equal-weighted 'A'share portfolio return.To sum up, we find significant impact of crude oil price shocks on Chinese stock market. We also find that both the macro-economic variables and household consumption paly important roles.