Spillover effect of financial market and oil market based on binary VAR-GARCH (1,1)-BEKK model

Key words:  international oil prices  financial attributes  spillover effects  BEKK model

Abstract:

With increasing interacting between the international and the domestic financial markets, as well as strong coupling between the oil market and financial markets, the financial attributes of petroleum nowadays play a more evident role in dominating the oil price. The international financial factors are more likely to influence the stock market in China through the "affecting oil" way. Taking the volatility of oil prices out of the traditional reasons after the year of 2002as the opportunity, VAR model and GARCH-BEKK model were established to analyze the correlation between these three markets studied. The results show that the international financial factors and international oil prices interact with each other, and then have unidirectional spillover effects on Chinese stock market. This can provide the necessary reference and guidance for China to take measures at the policy level, to buffer and avoid adverse impact of fluctuations in international oil prices, and therefore to maintain domestic oil prices and economic development stability.