Dependence and spillover among oil market, China's stock market and exchange rate: new evidence from the Vine-Copula-CoVaR and VAR-BEKK-GARCH frameworks

Hongjun Zeng; Abdullahi D Ahmed; Ran Lu; Ningjing Dai

doi:10.1016/j.heliyon.2022.e11737

Dependence and spillover among oil market, China's stock market and exchange rate: new evidence from the Vine-Copula-CoVaR and VAR-BEKK-GARCH frameworks

Heliyon. 2022 Nov 18;8(11):e11737. doi: 10.1016/j.heliyon.2022.e11737. eCollection 2022 Nov.

Authors

Hongjun Zeng¹, Abdullahi D Ahmed², Ran Lu³, Ningjing Dai⁴

Affiliations

¹ School of Accounting, Information Systems and Supply Chain, RMIT University, Australia.
² School of AISSC-RMIT University, Melbourne, Australia.
³ GreenCrush, Melbourne, Australia.
⁴ Agricultural Bank of China Hangzhou Branch, Hangzhou, China.

Abstract

We first employ the method of multivariate GARCH models and Vine-Copula-CoVaR to analyse relationships between dependence, systematic risk spillover, and volatility spillover between the USD/CNY exchange rate and the returns on WTI crude oil futures and the Chinese stock market since China's 2005 foreign exchange reform. We utilise daily data from 2005 to 2020. We find a more complex dependence of the USD/CNY exchange rate on stock markets and WTI crude oil prices. All have negative risk spillovers among paired markets, with WTI having the most substantial risk spillover. However, the strength of the systematic risk spillover varies across markets. Based on the results of the VAR(1)-BEKK-GARCH $(1, 1)$ and Wald tests confirm that there is a substantial mean spillover from the Chinese stock market and the USD/CNY exchange rate to the WTI crude oil price, whereas there is a more significant spillover from the WTI crude oil price to Chinese stock market volatility. The empirical findings extend the systematic understanding of the international crude oil price shocks to the dependence and transmission mechanism between the Chinese stock market and the USD/CNY exchange rate (USD/CNY). Our findings can help investors and policymakers to manage risk better and develop more sensible market rules.

Keywords: Chinese stock market; Crude oil; Exchange rate; Multivariate GARCH; Vine-Copula-CoVaR.