Impact Of Oil Price Fluctuations On Stock Market Returns Of China

As the most important strategic fossil energy,crude oil plays a vital role in industrial production,economy growth,social development and political stability around the world.Since America's shale gas revolution and Middle East's geopolitical crises,the international oil market has been undergoing a profound transformation,with oil prices moving from extreme volatile phase to low fluctuation phase,with market structure transiting from a sellers' market where demand exceeds supply to a buyers' market where supply exceeds demand,transaction form changing from focusing on physical spot products to trading more and more financial derivatives,market power evolving from monopolistic competition with few dominant forces to multi-race competition with several equivalent forces.As one of the countries with the highest degree of dependence on imported oil,China is inevitably affected by the frequent fluctuations of international oil price.Oil price fluctuations then very likely transmit to stock market through the real economy.Over the past two decades,Chinese stock market has gone through a process from boom to gloom,with the Shanghai Composite index falling from historic highs to long lasting bottoms.Thus,investors of Chinese stock market have come up with several conjectures about the relationship between international oil price fluctuations and Chinese stock market returns.Meanwhile,many foreign and domestic scholars have shown increasing interest in investigating impacts of oil price shock on the stock market.On the macro level,the central government is trying to improve the market mechanism and to eliminate the imbalance between the real economy and financial markets through the “supply side reform”,aiming to achieve policy goals including ensuring oil supply security and promoting the sound and stable development of the stock market.Theoretically,oil price fluctuations can influence stock prices via the following three channels:(1)oil price changes directly affect production inputs and investment costs,thereby affecting firms' futures cash flows;(2)Higher oil prices lead to higher inflationary pressure and higher interest rates,raising firms' financial costs and reducing profits;(3)Oil price fluctuations cause changes in consumers' ' disposable income and spending power,which in turn influence demand for final products and profits of production enterprises.Although oil price changes are generally considered as an important impact factor of stock price fluctuations,there has been no consensus on the relationship of stock market returns and oil prices.Kling(1985)investigates the relationship between international oil market and the U.S.stock market during the period of 1973-1982,and finds that oil price increases are associated with stock market falls.Chen et al.(1986)indicates that oil price changes have no influence on asset prices.Jones and Kaul(1996)reveals that there is a stable negative relationship between oil price changes and the aggregate stock market returns.Obviously,disparities in research methods,research objects and research perspectives lead to mixed conclusions.Therefore,it is necessary to conduct further in-depth study.Kilian(2009)shows that oil price shocks can be decomposed into oil supply shocks,aggregate demand shocks and oil-market specific demand shocks,and different sources of oil price shocks have different influences on stock market returns.Cong et al.(2008)finds that oil price shocks only have positive impacts on manufacturing index and some individual oil company stocks,while have no significant influence on the majority.Angelidis et al.(2015)examines the relationship between oil price shocks and the stock market in bull and bear markets using a Markov regime-switching model,and finds that oil price shocks have asymmetric effects on stock returns.It can been seen from the existing literature that differentiating sources of oil price shocks,conducting sectoral analyses,and considering the possibility of nonlinear effects are three crucial aspects in comprehensively and accurately examining the impact of oil price shocks on stock returns.However,few studies have considered them simultaneously.Thus,this paper combine the oil price shock decomposition,sectoral analyses and nonlinear effects in a unified framework.Specifically,this paper explores the nonlinear impacts of international oil price shocks of different sources on Chinese stock market returns from perspective of the aggregate market and different industries.Based on the data of aggregate market index and industrial stock indices,this paper investigates the nonlinear effects of different sources of international oil price shocks Chinese stock market during the period from February 2001 and August 2016 by combing normative analysis with positive analysis.In the aspect of normative analysis,this paper summarizes current studies about the influences of oil price fluctuations on stock market returns,focusing on the oil shock decomposition approaches,sectoral level analyses and methods capturing nonlinear effects.In the aspect of positive analysis,this paper applies a three-stage method that uses SVAR model,historical decomposition and Markov regime-switching model in each stage respectively.The thesis consist of five sections.Section 1 is introduction,which introduces the research background,significance and objects of the study.As the world's largest importer of oil,China's economy growth is highly dependent on international oil.Chinese stock market can be more vulnerable to international oil price shocks than other stock markets.No matter from the perspective of economic and social development,from the perspective of stock market investors,or from the perspective of academic research,investigating the impacts of international oil price shocks on Chinese stock returns is of great practical significance.Section 1 also briefly describes the main methodology and research content.Section 2 is literature review,coming and summarizing the existing literature related to the influences of oil price fluctuations on stock market returns,finding out the drawbacks in current studies,and building a preliminary research framework.Section 3 is research design,presenting the research framework and the econometric methodology in detail.Firstly,the SVAR model is used to identify oil price shocks and to decompose the structural shocks driving oil price fluctuations into oil supply shock,aggregate demand shock and oil-market specific demand shock.Then the aggregate demand shock is further decomposed into foreign demand shock and domestic demand shock.Secondly,the historical decomposition method is applied to calculate the cumulative effects of oil supply shock,aggregate demand shock(foreign demand shock and domestic demand shock)and oil-market specific demand shock on historical oil price fluctuations.Thirdly,under the assumption of predetermined oil prices,the Markov regime-switching model is used to estimate the nonlinear impact coefficients of different oil price shocks on stock market returns,with the historical decomposition series of oil price returns being independent variables,and the Shanghai Composite Index return and 10 Wind industrial index returns being the dependent variable respectively.Section 4 is empirical result analysis.The main findings of this thesis are:(1)During the period from February 2001 to August 2016,Chinese demand has very limited influence on the international oil price.Most of the oil price fluctuations come from changes of precautionary demand,financial speculative demand and OECD foreign aggregate demand.(2)On the aggregate market level,international oil price shocks have significant asymmetric impacts on Chinese stock returns,which show stronger influences in the low-volatility regime than in the high-volatility regime.(3)On the sectoral level,the impacts of international oil prices on Chinese stock returns also present significant asymmetries,which are strong in the low-volatility regime and weak in the high-volatility regime.(4)Oil price increases resulting from supply shocks only have a significantly positive impact on financial index returns in the low-volatility regime and have no significant impacts on other sector returns.(5)Oil price increases driven by foreign demand shocks have significantly positive impacts on seven sector returns in low-volatility regime,and significantly negative impacts on two sector returns in high-volatility regime.Oil price changes driven by domestic aggregate demand shocks have no significant impacts on all sector returns,whether in the low-volatility regime or in the high-volatility regime.(6)Oil price increases resulting from oil-market specific demand shocks have significantly positive impacts on 4 sector returns in the low-volatility regime,and also have a significantly positive impact on information technology index returns in the high-volatility regime.This paper makes three key contributions to the literature investigating the impacts of oil price shocks on stock market returns.Firstly,I use the SVAR model to conduct a structural decomposition of oil price shocks,overcoming the endogeneity problem of oil price changes and separating out different sources of oil price shocks.This structural decomposition ensures the completeness and comprehensiveness of the analysis.In addition,I further decompose global aggregate demand shocks into foreign demand shocks and domestic demand shocks,thus can explore the role of Chinese factors in oil price fluctuations.Secondly,besides using the composite market index,I also apply sector index data to conduct sectoral analysis.sectoral analysis not only can capture performance differences in sector returns,thus provide advices for diversified investment and help to control portfolio risks more efficiently,but also is helpful to reveal the transmission mechanism of oil price shocks to Chinese economy.(3)I consider the asymmetric effects of oil price shocks by using the Markov regime-switching model.Traditional linear regression models may conceal the asymmetric characteristics of the relationship between oil price shocks and stock returns.Thus,this paper uses the Markov regime-switching model to capture the nonlinear impacts of oil price shocks on stock market returns,avoiding biases arising from the use of linear models.Although,this paper make some innovations on the basis of relevant literature and obtain a few useful conclusions,there are still several shortcomings due to the limitation of time and research ability.(1)Due to data availability,the paper uses OECD aggregate demand as a proxy for foreign aggregate demand.Actually,foreign aggregate demand should be equal to the sum of production indices of all countries in the world except for China.Therefore,using OECD aggregate demand as a proxy for foreign aggregate demand may lead to estimation bias.(2)The Markov regime-switching model is used in this paper to capture the nonlinear impacts of oil price shocks on stock market returns.In Markov regime-switching models,shifts of regimes are governed by a exogenous state variable following a first-order Markov process,which can efficiently avoid the model specification error caused by improper switching variables.However,the Markov regime-switching mode cannot tell the underlying mechanism of regime switching,which means we do not know what factors cause the stock market enter into the high-volatility or low-volatility regime.