Volatility spillovers between crude oil and Chinese sectoral equity markets: Evidence from a frequency dynamics perspective

Abstract

We examine the frequency dynamics of volatility spillovers between crude oil and China's stock markets in a spectral representation framework of generalized forecast error variance decomposition using sectoral stock indices data. We find evidence of total volatility spillover driven mainly by short-term spillovers. The net spillovers of the oil market are almost all positive and dominated by short-ter.m components, although the spillover during China's 2015 financial crisis is negative and attributable to long-term components. In addition, there exists heterogeneity in net pairwise (frequency) spillovers between the oil and sectoral stock markets. Moreover, structural breaks in volatilities appear to be a significant feature of volatility spillovers. Finally, frequency spillovers in our system can predict future stock market volatility. These results have economic implications for investors and policymakers.