Extreme quantile spillovers and connectedness between oil and Chinese sector markets: A portfolio hedging analysis

Abstract

Oil price instabilities have direct and heterogeneous implications for stock sector markets as a result of portfolio risk management and fund allocations. Previous studies have shown that the oil-stock market nexus is asymmetric and strongly vulnerable to international events. Using daily data of ten Chinese stock sector indices and the West Texas Intermediate crude oil futures over the period from July 2, 2007, to September 3, 2021, we examine the quantile return spillovers and interconnectedness between these markets using the approach of Ando et al. (2022), showing that return spillovers between the markets under investigation are more pronounced under bearish market conditions than during bullish ones. Major financial, political, energy, and COVID-19 pandemic events have magnified spillovers. Irrespective of the state of the market, oil is always a net receiver of return spillovers. Moreover, for all sectors other than materials, the sector that acts as a net receiver during bearish market conditions becomes a net contributor during bullish market conditions, and vice versa. During the COVID-19 period, the hedging technique was the most cost-effective. In the event of a global pandemic, the IT, financial, telecommunication, and energy sectors can benefit from oil's higher hedging effectiveness. Oil was a cheaper hedging asset during the pandemic, and it offered the highest hedging effectiveness to utilities before the outbreak and to the financial sector during the COVID-19 pandemic.