Oil prices, stock returns, and exchange rates: Empirical evidence from China and the United States

Employing the diagonal BEKK model as well as the dynamic impulse response functions, this study investigates the time-varying trilateral relationships among real oil prices, exchange rate changes, and stock market returns in China and the U.S. from February 1991 to December 2015. We highlight several key observations: (i) oil prices respond positively and significantly to aggregate demand shocks; (ii) positive oil supply shocks adversely and significantly affect the Chinese stock market; (iii) oil price shocks persistently and significantly impact the trade weighted US dollar index negatively; (iv) the US and China stock markets correlate positively just as the dollar index and the exchange rate does; (v) a significant parallel inverse relation exists between the US stock market and the dollar and between the China stock market and the exchange rate; and (vi) the Chinese stock market is more volatile and responsive to aggregate demand and oil price shocks than the US stock market in recent years.