Decomposition of oil price shock, changes in market conditions and systemic risk transmission – an analysis from the Chinese perspective

Abstract

ABSTRACT This research aims to investigate the heterogeneous responses of each specific risk variable across different states in the context of varying levels of crude oil price shocks. Using data period from 27 December 2007 to 28 October 2022, we construct proxy variables for systemic financial risks based on the considerations of four specific perspectives. The results of the empirical analysis indicate that oil price fluctuation observed in short, medium, and long-term time periods has an obvious impact on each risk variable. From the evaluation of conditional value-at-risk difference as well as the marginal expected shortfall, both short-term and long-term shocks have an apparent amplifying effect on market risk when it is at a high level. When evaluated from the angle of liquidity, oil price shocks generally exhibit positive effects on market liquidity, where this effect is more significant in the long term rather than terms. When considering the effect of volatility specifically, oil price shocks are found to cause sharp shocks to the market, whether the market itself is in a stable or volatile state.