China's Impact on Price Shocks in the World Oil Markets
James F. Refalo
California State University, Los Angeles
September 18, 2008
The Journal of Energy Markets, Vol. 2, No. 1, pp. 89-113, March 2009
This paper examines China's influence on price shock transmission in the world oil markets. In this paper, its impact is studied by testing for cointegration, mapping causality using a technique called directed acyclic graphs (DAG), and integrating the results of DAG into an error correction model to conduct variance decomposition. Using data from the period 1997-2007, evidence is presented that China has had little impact on the volatility in international oil markets, and that innovations in the Chinese market (in the long run) are largely driven by innovations from external markets. This study also indicates that the Chinese market is the largest source of its own volatility over short horizons, and that the Organization of the Petroleum Exporting Countries and the US oil markets are responsible for much of the price volatility observed in the world markets.
Number of Pages in PDF File: 31
Keywords: Directed Acyclic Graphs, DAG, Causality, Cointegration, ECM, Error Correction, Oil price, Oil prices, Price Shock, Petroleum, VAR, volatility transmission
JEL Classification: Q49, G15, C32, C53Accepted Paper Series
Date posted: February 26, 2009 ; Last revised: January 5, 2010
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