Economic Modelling 42(2014)413-420 Contents lists available at ScienceDirect Economic Modelling ELSEVIER journal homepage:www.elsevier.com/locate/ecmod Return and volatility spillovers between china and world oil markets CrossMark Bing Zhang,Peijie Wang b.1 Department of Finance and Insurance,Nanjing University,PR China School of Management,University of Plymouth.UK ARTICLE INFO ABSTRACT Article history: We examine return and volatility spillovers between China and world oil markets.This topic is of great Accepted 3 July 2014 importance because China is the world's second-largest oil importer and has exhibited substantial growth in Available online 8 August 2014 oil consumption.Extending Diebold and Yilmaz's(2012)method of catching spillover dynamics,it is found that return and volatility spillovers between China and world oil markets are bi-directional and asymmetric. Keyword达： The Chinese oil market is highly affected by world oil markets and exerts an influence on world oil markets. China World oil market although to a lesser extent.Moreover,the volatility spillover index has increased significantly since the peak of Spillover index the last financial crisis in September 2008.Although the US oil market impacts China's market most in terms Financial crisis of spillover,the influence of China's oil market on the world oil market has intensified in recent years. Volatility 2014 Elsevier B.V.All rights reserved 1.Introduction at levels referenced to those of international markets to maintain the incentive for the exploration and production of crude oil within China. A deep understanding of return and volatility spillovers between Consequently,the sharp fluctuations in world oil prices may have a China and world oil markets is of great importance.First,China is the great impact on China's institutions,individuals and even entire econo- world's second-largest oil consumer behind the US.The increasing my.Second,the 2008 subprime crisis in the US heavily influenced the demand for and greater dependence on imported crude oil in China world economy,including the Chinese economy.After the financial could lead to closer connections between Chinese and international oil crisis,an enormous drop in world oil prices made the co-movement markets.China's oil import reached 305.9 million tons in 2011 and between China and world oil prices even more tightly linked.This was ranked second in the world.However,China uses only one tenth development has reignited the researcher's interest in the return and of the per capita oil consumption of the US,so there is plenty of room volatility spillover effect between China and world oil markets.It is of for the country's consumption to (attempt to)grow.This phenomenon importance to know whether international market linkages have promises to maintain strong pressure on energy prices for the foresee- strengthened after the financial crisis.Third,understanding return and able future(BP.2011).According to the International Energy Agency. volatility spillovers between China and world oil prices is helpful for in- China's oil consumption growth represented over a third of the world's stitutional and individual investors to engage in effective risk manage- oil consumption growth in 2010.IEA forecasts that China's oil consump- ment and superior asset allocation.For policy makers and regulators, tion will continue to grow during 2012 and 2013 at a moderate pace. more information about spillover characteristics of China and the Even so,the anticipated oil growth of over 0.8 million barrels per day world oil markets they obtain will enable better energy policies.During between 2011 and 2013 would represent 64%of the projected growth the crisis,the world witnessed increasing volatility spillovers across in world oil demand during the 2-year forecast period.2 Since 1998. markets.There exists great practical value in measuring and monitoring the market mechanism of oil pricing has gradually been established in such spillovers-both to provide "early warning systems"for emergent China,and crude oil in the Chinese domestic market has been priced crisis and to track the progress of potential crises.Finally,the impact of China's increased oil demand on oil prices has become a hot topic of debate in recent financial press,these debates prompt us to conduct a further investigation. The spillover effect among different markets is a hot topic that has Corresponding author at:Department of Finance and Insurance,Business School, recently attracted a large volume of empirical research.Lanza et al. Nanjing University.210093.PR China.Tel:+86 25 83621102. E-mail address:zhangbing@njueducn(B.Zhang). (2005)examine heavy crude oil prices from 1994-2001 for Europe 1Te:+441752585705. and the US,using an error correction model.Lin and Tamvakis(2001) 2 http://www.eia.gov/countries/cab.cfm?fips-CH. investigate volatility spillover effects between NYMEX and International http://dx.doi.org/10.1016/j.econmod.201407.013 0264-99930 2014 Elsevier B.V.All rights reserved.Return and volatility spillovers between china and world oil markets Bing Zhang a, ⁎, Peijie Wang b,1 a Department of Finance and Insurance, Nanjing University, PR China b School of Management, University of Plymouth, UK article info abstract Article history: Accepted 3 July 2014 Available online 8 August 2014 Keywords: China World oil market Spillover index Financial crisis Volatility We examine return and volatility spillovers between China and world oil markets. This topic is of great importance because China is the world's second-largest oil importer and has exhibited substantial growth in oil consumption. Extending Diebold and Yilmaz's (2012) method of catching spillover dynamics, it is found that return and volatility spillovers between China and world oil markets are bi-directional and asymmetric. The Chinese oil market is highly affected by world oil markets and exerts an influence on world oil markets, although to a lesser extent. Moreover, the volatility spillover index has increased significantly since the peak of the last financial crisis in September 2008. Although the US oil market impacts China's market most in terms of spillover, the influence of China's oil market on the world oil market has intensified in recent years. © 2014 Elsevier B.V. All rights reserved. 1. Introduction A deep understanding of return and volatility spillovers between China and world oil markets is of great importance. First, China is the world's second-largest oil consumer behind the US. The increasing demand for and greater dependence on imported crude oil in China could lead to closer connections between Chinese and international oil markets. China's oil import reached 305.9 million tons in 2011 and was ranked second in the world. However, China uses only one tenth of the per capita oil consumption of the US, so there is plenty of room for the country's consumption to (attempt to) grow. This phenomenon promises to maintain strong pressure on energy prices for the foresee￾able future (BP, 2011). According to the International Energy Agency, China's oil consumption growth represented over a third of the world's oil consumption growth in 2010. IEA forecasts that China's oil consump￾tion will continue to grow during 2012 and 2013 at a moderate pace. Even so, the anticipated oil growth of over 0.8 million barrels per day between 2011 and 2013 would represent 64% of the projected growth in world oil demand during the 2-year forecast period.2 Since 1998, the market mechanism of oil pricing has gradually been established in China, and crude oil in the Chinese domestic market has been priced at levels referenced to those of international markets to maintain the incentive for the exploration and production of crude oil within China. Consequently, the sharp fluctuations in world oil prices may have a great impact on China's institutions, individuals and even entire econo￾my. Second, the 2008 subprime crisis in the US heavily influenced the world economy, including the Chinese economy. After the financial crisis, an enormous drop in world oil prices made the co-movement between China and world oil prices even more tightly linked. This development has reignited the researcher's interest in the return and volatility spillover effect between China and world oil markets. It is of importance to know whether international market linkages have strengthened after the financial crisis. Third, understanding return and volatility spillovers between China and world oil prices is helpful for in￾stitutional and individual investors to engage in effective risk manage￾ment and superior asset allocation. For policy makers and regulators, more information about spillover characteristics of China and the world oil markets they obtain will enable better energy policies. During the crisis, the world witnessed increasing volatility spillovers across markets. There exists great practical value in measuring and monitoring such spillovers—both to provide “early warning systems” for emergent crisis and to track the progress of potential crises. Finally, the impact of China's increased oil demand on oil prices has become a hot topic of debate in recent financial press, these debates prompt us to conduct a further investigation. The spillover effect among different markets is a hot topic that has recently attracted a large volume of empirical research. Lanza et al. (2005) examine heavy crude oil prices from 1994–2001 for Europe and the US, using an error correction model. Lin and Tamvakis (2001) investigate volatility spillover effects between NYMEX and International Economic Modelling 42 (2014) 413–420 ⁎ Corresponding author at: Department of Finance and Insurance, Business School, Nanjing University, 210093, PR China. Tel.: +86 25 83621102. E-mail address: zhangbing@nju.edu.cn (B. Zhang). 1 Tel.: +44 1752 585705. 2 http://www.eia.gov/countries/cab.cfm?fips=CH. http://dx.doi.org/10.1016/j.econmod.2014.07.013 0264-9993/© 2014 Elsevier B.V. All rights reserved. Contents lists available at ScienceDirect Economic Modelling journal homepage: www.elsevier.com/locate/ecmod