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

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  • Zhi Su
  • Xuan Mo
  • Libo Yin

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.

Suggested Citation

  • Zhi Su & Xuan Mo & Libo Yin, 2021. "Downside Risk in the Oil Market: Does It Affect Stock Returns in China?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 57(11), pages 3139-3152, September.
  • Handle: RePEc:mes:emfitr:v:57:y:2021:i:11:p:3139-3152
    DOI: 10.1080/1540496X.2020.1796626
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    Citations

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    Cited by:

    1. Yin, Libo & Cao, Hong & Guo, Yumei, 2024. "The information content of Shanghai crude oil futures vs WTI benchmark: Evidence from temporal and spatial dimensions," Energy Economics, Elsevier, vol. 132(C).
    2. Wensheng Xiao & Yu Tang & Bright Obuobi & Shaojian Qu & Minglan Yuan & Decai Tang, 2023. "The Influence of Rule of Law on Government’s Sustainable Economic Management: Evidence from China," Sustainability, MDPI, vol. 15(15), pages 1-23, July.
    3. Chen, Bin-xia & Sun, Yan-lin, 2023. "Extreme risk contagion between international crude oil and China's energy-intensive sectors: New evidence from quantile Granger causality and spillover methods," Energy, Elsevier, vol. 285(C).

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