Abstract
Purpose This study aims to explore the linkage between fluctuations in the global crude oil price and equity market in fast emerging economies of India and China. Design/methodology/approach The present research uses wavelet decomposition and maximal overlap discrete wavelet transform (MODWT), which decompose the time series into various frequencies of short, medium and long-term nature. The paper further uses continuous and cross wavelet transform to analyze the variance among the variables and wavelet coherence analysis and wavelet-based Granger causality analysis to examine the direction of causality between the variables. Findings The continuous wavelet transform indicates strong variance in WTIR (return series of West Texas Instrument crude oil price) in short, medium and long run at various time periods. The variance in CNX Nifty is observed in the short and medium run at various time periods. The Chinese stock index, i.e. SCIR, experiences very little variance in short run and significant variance in the long and medium run. The causality between the changes in crude oil price and CNX Nifty is insignificant and there exists a bi-directional causality between global crude oil price fluctuations and the Chinese equity market. Originality/value To the best of the authors’ knowledge, very limited work has been done where the researchers have analyzed the linkage between the equity market and crude oil price fluctuations under the framework of discrete wavelet transform, which overlooks the bottleneck of non-stationarity nature of the time series. To bridge this gap, the present research uses wavelet decomposition and MODWT, which decompose the time series into various frequencies of short, medium and long-term nature.
Highlights
The linkage between the fluctuations in crude oil price and equity market has received significant thoughtfulness among industry practitioners and academicians globally
The study of influence of oil price fluctuations on the equity market has gained significance as the analysis of oil–stock market linkage plays a crucial role in asset allocation and portfolio risk management decisions
In case of China (Table 4), when we analyze the raw series data of both the variables, we find unidirectional causality from West Texas Instrument (WTI) crude oil price to SCIR
Summary
The linkage between the fluctuations in crude oil price and equity market has received significant thoughtfulness among industry practitioners and academicians globally. The study of influence of oil price fluctuations on the equity market has gained significance as the analysis of oil–stock market linkage plays a crucial role in asset allocation and portfolio risk management decisions. This may be owed to the fact that the movement in equity is dependent upon prevailing fundamental information and contingent upon the oil market information (Mensi et al, 2017). The rise in oil price has debilitating effect on oil importing nations and the same is favorable for oil exporting economies
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
