Does the international oil market interact with China’s financial market? New evidence from time-varying higher moments

Abstract

This paper analyzes the risk characteristics of the crude oil market and China’s financial markets and shows the connectedness between them from an innovative perspective at several key order-moment levels, including return, volatility, skewness, and kurtosis. We then analyze the dynamic role of each market in the network connectedness through case studies of specific risk events and a time-varying perspective. Our results extend and deepen research on the connectedness of crude oil and financial markets. The results show persistent conditional volatility, skewness and kurtosis in the crude oil market as well as in the Chinese financial markets (stock, fund, foreign exchange, and bond). Evidence of non-linear Granger causality and weighted directed network results using TVP-VAR model support the connectedness between the crude oil and the Chinese financial markets at different order moments (return, volatility, skewness and kurtosis). During financial risks and public health emergencies, the connectedness between markets increases, with different order-moment levels showing varying degrees of variability. At the higher-moment levels (skewness and kurtosis), crude oil is significantly more sensitive to shocks from risky events, behaving as a clear net exporter of risk, with a higher net spillover effect than its performance at the return and volatility levels. The Chinese foreign exchange, futures and bond markets mainly act as net receivers of risk, although the net spillover effect is more often positive at the level of skewness and kurtosis than at the level of returns and volatility. In contrast, the stock and fund markets are major risk exporters at the return and volatility levels, but turn out to be major risk receivers at the skewness and kurtosis levels.