This paper’s purpose is to test for asymmetry in the effect of oil price on China’s exchange rate and stock price in the presence of structural breaks. It also sought to examine if dynamic covariation and volatility spillover exists between the exchange rate and stock price. We utilized weekly time series data on Brent and WTI prices, the USD-RMB exchange rate, and Shanghai composite index ranging from 2005-07-19 to 2020-09-22. We applied the Nonlinear ARDL for asymmetry tests and the BEKK-GARCH and DCC-GARCH for volatility spilloever analysis. Our methodology also accounts for possible breaks in the time paths of exchange rate and stock price that are likely to influence cointegration. The results show that oil price has asymmetric effects on exchange rate in the long-run only and on stock price in the short-run only. We also find that oil price cointegrates significantly with exchange rate and stock price only when structural breaks in the data are accounted for. The multivariate GARCH analyses provide no evidence of spillovers between exchange rate and stock prices but the DCC estimates showed evidence of dynamic correlation between both. Although several other studies have researched the nexus among the three variables for China, none, to the best of our knowledge, has explicitly tested for short-run and long-run asymmetries in the effect of oil price on exchange rate and stock market jointly. The paper’s main contribution is the evaluation of asymmetry in oil price’s effects on both markets vis-à-vis the theory while accounting for structural breaks.
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