Tail dependence between oil prices and China's A‐shares: Evidence from firm‐level data

Sheng Fang and Paul Egan

International Journal of Finance & Economics, 2021, vol. 26, issue 1, 1469-1487

Abstract: Research in the area of tail dependence between oil prices and the stock market is sparse, particularly at the firm level. This article investigates lower and upper tail dependences between the price of crude oil and China's A‐share market by estimating an empirical copula with a rolling window. Our results show that tail dependence is increasing over time and that there are differences between lower and upper tail dependences in terms of incremental magnitude. We also find that the impulse responses of tail dependences to shocks to variables of interests vary significantly over the sample period. Our results also indicate that lower tail dependence, in particular, is found to have more than one breakpoint, and the break dates are highly associated with financial crises. In addition, we find evidence of asymmetry in tail dependence, which varies across periods. Finally, we find that tail dependence is persistent in the short‐term but deteriorates as the duration increases. These findings have important implications for investors, risk managers and policy makers.

Date: 2021
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