Identifying bubbles and the contagion effect between oil and stock markets: New evidence from China

Abstract

This study employs six price series from international and Chinese crude oil markets and Chinese stock market to test for bubbles. Based on the efficient market hypothesis and the Generalized Supremum Augmented Dickey–Fuller test, we identify two bubble episodes in each series, namely, the 2007–2008 global financial crisis and 2014–2015 oil excess capacity bubbles. Furthermore, using Granger causality test, we find empirical evidence for the bilateral contagion effect of bubbles between oil markets and Chinese stock market. The direction of contagion is from stock to oil market for the first bubble and from oil to stock for the second. We also find that Chinese oil market is becoming increasingly sensitive to the fluctuation of the international oil prices. These findings provide important enlightenments for regulators to prevent systematic financial risks and for investors to diversify their portfolios.