Risk spillover from international crude oil markets to China’s financial markets: Evidence from extreme events and U.S. monetary policy

Abstract

• We investigate the risk spillover between oil and China’s financial markets by considering the higher-order moment. • The extreme events significantly increase the risk spillover from crude oil markets. • The risk spillover to China’s financial market is heterogeneous regarding different extreme events and sub-markets. • U.S. monetary policy moderates the risk spillover effects of the oil market. • An unconventional policy may increase the risk spillover in the early stage of a crisis. We study the risk spillover from international crude oil markets to China’s financial markets by considering the shocks from extreme events and the moderating effect of U.S. monetary policy. Using the data of international oil markets and China’s financial markets from October 9, 2006, to March 8, 2022, we investigate the shocks of extreme events to risk spillover based on the GARCHSK-TVP-VAR-DY model with higher-order moments; we then empirically examine the moderating effect of the U.S. monetary policy (quantitative easing). The results reveal that (1) the international crude oil market has a significant net risk spillover effect on China’s financial markets; (2) the degree of spillover from the oil markets to the financial markets increases significantly under the shocks of extreme events; (3) the risk spillover effects of the oil markets on China’s various financial sub-markets are heterogeneous, with a more significant spillover to the commodity, foreign exchange, and monetary markets and a less significant spillover to the bond and stock market; and (4) U.S. quantitative easing policy alleviates the risk spillover effects of the oil market to Chinese financial markets, while U.S. monetary policies surpassing the conventional level may increase the risk spillover in the early stage of a severe crisis. Overall, this study has important implications for market participants and policymakers on spillover risk management.