Spillover Effect Between Returns On Crude Oil Future And St-ock Market:Theory And Empirical Study

This thesis investigates to what extent globalization and regional integration lead to increasing equity market interdependence. We focus on the case of China, the U.S. and the crude oil future market. More specifically, as the representative of the world’s emerging economies, China’s economy blooms with rising demand for oil makes China the world’s second-largest oil consumer in2003. Oil plays an important role in the global energy pricing mechanism and puts complex impacts on the economy. With the deepening of economic globalization, China starts to enjoy the indispensable role in the international oil market.In this thesis, we study the volatility spillover effects between the crude oil future market and the stock market, which help us evaluating the degree of integration of financial market in both China and the United States, and provide financial market investors some relevant references on decision making. The impact of spillover effects may evaluating the stock markets’reaction to the oil shocks, and the comparative analysis of the China-US spillover effects helps to assess the risk of the markets.The theoretical analysis and empirical study is arranged as follow. First, we give a brief literature review on spillover effects and the volatility of different capital markets. Then we define the fundamental-channel spillover effects, capital-channel spillover effects and expect-channel spillover effects theory, based on the development of China and the U.S. stock market and the international oil markets.Using daily data from January2003to December2012, we estimate a VAR-GARCH-BEKK model and find evidence of return and volatility spillovers between the China stock market, the U.S. stock market and the crude oil future market. To account for time-varying integration, we use MCMC and BP structural change point estimation method and set the full sample into two sub-samples. We apply Impulse Response Function and the Dynamic Correlation Coefficient to test the spillover effects. We find that in both countries, the spillover effect between stock market and the oil future market are weakened in the second sub-sample. Increased trade integration, equity market development, and the development of information technology are shown to have contributed to the weakening of oil shock spillover intensity. Finally, we have some evidences for these interesting implications, market participants whose risk management policy is based on stock prices which themselves may depend on the volatility level, and we put forward some policy advises at the end of this thesis.