Asymmetric Impact of Structural Shocks of Crude Oil Price on Equity Market in Two Large Emerging Market Economies: Evidence from China and India

Abstract

The objective of this particular study is to understand the asymmetric impact of structural shocks (in terms of supply and demand shocks on crude oil price) on equity market returns in the context of the largest two emerging market economies, that is, China and India. The timeframe of this study is January 1996 to January 2022. The study has been conducted, based on monthly data. The present study employs a structural vector auto regression as well as NARDL model to understand the asymmetry of these structural shocks. Our findings are in contradiction to the popular perception of the Press that crude oil price and equity market returns are inversely related. The present study found that different structural shocks have very different impacts on the stock returns. Our study also adds to the existing literature, as it showed that both the Chinese and Indian markets react in similar fashion to structural shocks in the crude oil market. Structural shocks have no impact on the Indian market, whereas there is a significant asymmetric impact of only precautionary demand shock in, both, the long and short runs, in the context of the Chinese market.