Economics SEEC Seminar: Global Oil Prices and their Impact on Chinese Energy and Resource Related Stock Values

When?

Monday 17 January 2011, 14:00 to 17:30

Where?

LTF

Open to:

Staff, Students, Public

Speaker:

David Broadstock (Research Institute of Economics and Management (China))

David Broadstock (Research Institute of Economics and Management (China))

"Global Oil Prices and their Impact on Chinese Energy and Resource Related Stock Values" (with Dayong Zhang)

Abstract
This work explores the relationship between the global price of oil (OP) and stock returns for the portfolio of energy and resource related stocks (ERP) listed with the Shanghai stock exchange. The data are relatively high frequency weekly observations covering the period December 2000 through to October 2010, a period which has witnessed several complex and major events such as a stock market bubble bursting, an Asian financial crisis, SARS, a global financial crisis etc. Capturing such features within a tractable empirical econometric framework is a daunting challenge.

Based upon a Capital Asset Pricing Model (CAPM) type framework it is proposed that important information regarding the relationship between OP and ERP can be revealed using a relatively simple Generalized Auto-Regressive Conditionally Heteroskedastic (GARCH) model structure with controls for structural breaks. However such an approach implies that volatility is a residual ‘problem’, though it is possible to consider that maybe such volatility is functional in the relationship between OP and ERP, and should be considered within an econometric framework that allows coefficients to vary with respect to time. This is done using a Dynamic Linear Model (DLM), or state-space, representation of the relationship allowing for Time Varying Parameters (TVP). To avoid potentially detrimental analytical assumptions regarding the structure and consequence of unobservable basis functions, and the impacts of known events inter alia, a semi-parametric estimation method is used for the TVP-DLM.

The results of both the GARCH model and the DLM imply a positive relationship between OP and ERP, suggesting that rising global oil prices generate positive benefits for the energy and resource related industries of China. With a long run expectation that oil global oil prices will continue to rise as finite stocks are gradually depleted, prospects for positive returns in Chinese energy and resource related stocks will incentivise a great deal of future investment. However, the widely accepted phenomenon of oil price volatility and the deep political and macro-economic connections to oil prices make future oil prices difficult if not impossible to predict at present.