China & World Economy / 43–62, Vol. 26, No. 3, 2018

Reinvestigating the Oil Price–Stock Market Nexus:
Evidence from Chinese Industry Stock Returns

Sheng Fang, Xinsheng Lu, Paul G. Egan*

Abstract

The present study investigates the influence of international oil prices on China’s stock market returns across 29 different industries. The paper attempts to account for any structural breaks and nonlinearity in this relationship. The results reveal that the effect of changes in the international price of oil on stock returns differs substantially across industries. The stock returns of the coal, chemical, mining and oil industries are found to be positively affected by crude oil price movements. Conversely, electronics, food manufacturing, general equipment, pharmaceuticals, retail, rubber and vehicle industries are found to be negatively affected by movements in the price of crude oil. The results of the estimations also suggest that the majority of Chinese industries have been significantly affected by oil prices since 2004. The influence of international oil prices on Chinese stocks also has a stronger effect in the presence of high volatility but the effect varies across industries.

Key words: China’s stock market, international oil prices, regime switching, structural break
JEL codes: C58, G12, Q48