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Shocks and Stocks: A Bottom-up Assessment of the Relationship Between Oil Prices, Gasoline Prices and the Returns of Chinese Firms

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Abstract:
Oil price shocks are known to affect the financial sector of the economy, due to the inflationary effects, and increasing costs of doing business they create. Though oil-shocks and financial markets are widely researched, there remains scope for deeper understanding using firm level data. We therefore contribute to the literature by extending widely applied multi-factor asset pricing models to a sample of 963 Chinese firms (between 2005-2013) to (i) systematically evaluate their reactions to oil price shocks, and (ii) further include regulated gasoline prices as a more direct measure of the energy-prices faced by firms. 89.2% of firms are susceptible to oil shocks, with positive and negative reactions observed even for firms within the same industry. Gasoline price shocks are more pervasive, affecting 95.7% of firms. Considering oil and gasoline separately allows us to review gasoline price regulation in China, which ultimately appears ineffective in achieving its intended goals.

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JEL Codes: Q43: Energy and the Macroeconomy, Q41: Energy: Demand and Supply; Prices, Q35: Hydrocarbon Resources, Q31: Nonrenewable Resources and Conservation: Demand and Supply; Prices

Keywords: China, Financial markets, Oil price shocks, Gasoline price shocks, Firm-level

DOI: 10.5547/01956574.37.SI1.dbro

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Published in Volume 37, China Special Issue of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.