Oil prices, stock returns, and exchange rates: Empirical evidence from China and the United States
Shuming Bai and
Kai S. Koong
The North American Journal of Economics and Finance, 2018, vol. 44, issue C, 12-33
Employing the diagonal BEKK model as well as the dynamic impulse response functions, this study investigates the time-varying trilateral relationships among real oil prices, exchange rate changes, and stock market returns in China and the U.S. from February 1991 to December 2015. We highlight several key observations: (i) oil prices respond positively and significantly to aggregate demand shocks; (ii) positive oil supply shocks adversely and significantly affect the Chinese stock market; (iii) oil price shocks persistently and significantly impact the trade-weighted US dollar index negatively; (iv) the US and China stock markets correlate positively just as the dollar index and the exchange rate does; (v) a significant parallel inverse relation exists between the US stock market and the dollar and between the China stock market and the exchange rate; and (vi) the Chinese stock market is more volatile and responsive to aggregate demand and oil price shocks than the US stock market in recent years.
Keywords: Diagonal BEKK; Oil prices; Stock markets; Exchange rates; Impulse response; Function; Dynamic correlation (search for similar items in EconPapers)
JEL-codes: C32 F31 G15 Q43 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:44:y:2018:i:c:p:12-33
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