Relationship between Chinese and International Crude Oil Prices: A VEC-TARCH Approach

Changming Song,Chongguang Li

doi:10.1155/2015/842406

Changming Song, Chongguang Li

Open Access

https://doi.org/10.1155/2015/842406

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Abstract

Many studies focus on the impact of international crude oil price volatility on various economic variables in China with a hypothesis that international crude oil price affected Chinese crude oil price first and then other economic variables. However, there has been little research to explore whether or not international and Chinese oil market are integrated. This study aims to investigate the relationship between Chinese and international crude oil prices by VAR and VEC-TARCH models. It was found that the two crude oil markets have been integrated gradually. But the impact of external shocks on the Chinese crude oil market was stronger and the Chinese crude oil price was sensitive to changes in international crude oil price, implying that the centrally controlled oil market in China is less capable of coping with external risk. In addition, the volatility of both Chinese and international crude oil prices was mainly transmitted by prior fluctuation forecast and the impact of external shocks was limited, demonstrating that in both cases volatility would disappear rather slowly. Furthermore, Chinese and international crude oil markets have established a stable relationship. When the direction of external shocks on the two variables’ respective stochastic term was consistent, the impact on the two variables’ joint volatility was aggravated and vice versa.

Highlights

There is an extensive body of literature analyzing the impact of oil price fluctuations on the Chinese economy [1]
We carried out an augmented Dickey-Fuller (ADF) test with the null hypothesis that the Chinese or international crude oil price has a unit root
This study first utilized the Granger causality model to test for a statistical causal relationship between the Chinese and international crude oil prices

Summary

Introduction

There is an extensive body of literature analyzing the impact of oil price fluctuations on the Chinese economy [1]. Positive oil price shocks had negative effects on Chinese macroeconomics [2]. China’s imports and exports, which are important for the Chinese economy, are correlated with the oil price [5, 6]. Negative oil price shocks had strong influences on Chinese grains, metals, petrochemicals, and oil fats [7]. A positive oil price shock leads to significant profit increases for the Chinese petroleum and natural gas extraction industry but negative influence on petroleum processing industry [8]. In contrast to metals and grains, petrochemicals and oil fats indices responded to global oil price shocks [10]

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