Linkages between Energy Prices and Energy Stocks in China: A Study Based on Wavelet Analysis

Author:

Zhao Tianyu1,He Yongda2ORCID,Bai Martin3,Shao Shuai4

Affiliation:

1. Henan Institute of Technology: Henan Institute of Science and Technology

2. Shanxi University of Finance and Economics

3. The University of Waikato

4. East China University of Science and Technology

Abstract

Abstract This study constructs a comprehensive energy price index and applies the Morlet continuous wavelet transform to investigate the relationship between energy prices and energy industry stock markets. It also tests the multi-scale linear and nonlinear causality using multi-resolution decomposition. The empirical findings indicate that: (1) energy prices and stock market volatilities demonstrate a stable negative correlation in the medium- and long-term frequency domain, and the fluctuation of energy stock prices precedes that of energy prices since 2018. (2) Energy prices and stock markets exhibit bidirectional causality. The short- and medium-term driving effects of energy stocks and energy prices are more pronounced than the overall change in stock markets over a period of 16 months. The linkage between energy prices and stock markets is primarily influenced by the stock market leading and driving energy price changes, indicating a common long-term trend. (3) In the long run, fluctuations in Chinese stock markets will lead to a reverse change in energy prices, providing policy management in the energy industry with an effective reference. However, the unstable short-term characteristics and lag of energy price changes suggest that the impact of energy prices on stock market investment has less reference value.

Publisher

Research Square Platform LLC

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