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Oil market responses to Sino–European political relation shock: Insights after China's world trade organization accession

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  • Cai, Yifei
  • Li, Xiangdong
  • Zhang, Yahua

Abstract

We investigate how changes in political relations between Europe and China affect the oil market. When political relations improve, we find a significant increase in oil demand and prices, accompanied by a decrease in market uncertainty. However, the effects on oil supply and inventory are minimal. Additionally, we compute the forecast error variance decomposition and construct the counterfactual evolution of oil variables in the absence of the impacts of political relation shocks. We find that shifts in Sino–European political relations contribute more significantly to variations in oil market uncertainty than to other oil variables. Finally, we augment the vector autoregression model by incorporating the Sino–US political relationship index. Our findings reveal that this augmentation significantly changes the impacts.

Suggested Citation

  • Cai, Yifei & Li, Xiangdong & Zhang, Yahua, 2024. "Oil market responses to Sino–European political relation shock: Insights after China's world trade organization accession," Economic Modelling, Elsevier, vol. 141(C).
    • Handle: RePEc:eee:ecmode:v:141:y:2024:i:c:s0264999324002645
    DOI: 10.1016/j.econmod.2024.106907
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    More about this item

    Keywords

    Political relation shocks; China; Europe; Oil market; VAR;
    All these keywords.

    JEL classification:

    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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