How do dynamic jumps in global crude oil prices impact China's industrial sector?

Abstract

Given that sharply rising external risks pose great challenges to the stable development of China's industrial sector, extreme risks to the global oil market deserve more attention. This study investigated dynamic jumps in global oil prices and their impacts on China's industrial sector at the aggregate and subsector levels. We applied the asymmetric ARMA-EGARCH-ARJI model to analyze the characteristics of global oil price fluctuations and introduced the jump component into the ARMA-EGARCH-X model to examine the impacts of dynamic jumps on China's industrial sector. We distinguished oil price jumps under different oil market conditions to assess the asymmetric effect of jump shocks. We found that global oil price fluctuations contain both volatility clustering with asymmetry and dynamic jumps. At the aggregate level, oil price jumps have negative shocks on China's industrial sector returns and positive spillovers on its volatility. The impacts show hysteresis and will be reversely adjusted afterward, which implies an overreaction of the industrial market to current oil price jumps. Moreover, jump shocks display an asymmetric effect under different global oil market conditions, which is embodied by the fact that they will reduce industrial sector returns more when the oil price decreases than when it increases. The five industrial subsectors respond differently to oil price jump shocks. Our findings deserve particular attention from both market participants and policy makers.