Downside Risk in the Oil Market: Does It Affect Stock Returns in China?

Zhi Su, Xuan Mo and Libo Yin

Emerging Markets Finance and Trade, 2021, vol. 57, issue 11, 3139-3152

Abstract: In this paper, we investigate the impact of downside risk in the oil market on the expected stock returns in China’s A-share market, and find that downside risk positively influences the expected stock returns. This positive influence remains after controlling for various control variables. It is also robust under different stock market conditions and the financial crisis, and with high-frequency data as an alternative measure of downside risk. In addition, the positive relation is consistent across industries regardless of whether they are directly related to natural resources or only indirectly related to oil. We also find evidence of nonlinearity in the relation between the oil and stock markets. The positive relation can be explained by the global risk aversion of investors who are averse to downside risk in the oil market and thus demand compensation in the form of higher expected returns for holding stocks.

Date: 2021
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DOI: 10.1080/1540496X.2020.1796626

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