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The purpose of this paper is to empirically investigate the volatility spillover between the Chinese stock market, investor’s sentiment and oil market, specifically during the 2014‒2016 turmoil period.Design/methodology/approachThis study used the daily and monthly China market price index, oil-price index and composite index of Chinese investor’s sentiment. The authors first use the DCC GARCH model in order to study the correlation between variables. Second, the authors use a continuous wavelet decomposition technique so as to capture both time- and frequency-varying features of co-movement variables. Finally, the authors examine the spillover effects by estimating the BEKK GARCH model.FindingsThe wavelet coherency results indicate a substantial co-movement between oil and Chinese stock markets in the periods of high volatility. BEKK GARCH model outcomes confirm this relation and report the noteworthy bidirectional transmission of volatility between oil market shocks and the Chinese investor’s sentiment, chiefly in the crisis period. These results support the behavioral theory of contagion and highlight that the Chinese investor’s sentiment is a channel through which shocks are transmitted between the oil and Chinese equity markets. Thus, these results are important for Chinese authorities that should monitor the investor’s sentiment to better control the interaction between financial and real markets.Originality/valueThis study makes three major contributions to the existing literature. First, it pays attention to the recent 2015 Chinese stock market bumble. Second, it has gone some way toward enhancing our understanding of the volatility spillover between the investor’s sentiment, investor’s sentiment variation, oil prices and stock market returns (variables of interest) during oil and stock market crises. Third, it uses the continuous wavelet decomposition technique since it reveals the linkage between variables of interest at different time horizons.
International Journal of Emerging Markets – Emerald Publishing
Published: Mar 16, 2020
Keywords: Oil market; 2015 Chinese crisis; Continuous wavelet; G11; G12; G14
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