Date Published: June 18, 2019
Publisher: Public Library of Science
Author(s): Muhammad Kamran Khan, Jian-Zhou Teng, Muhammad Imran Khan, Stefan Cristian Gherghina.
This study scrutinized the asymmetric impact of oil prices on stock returns in Shanghai stock exchange with data (January 2000 to December 2018) by using asymmetric ARDL model. The examined results of asymmetric autoregressive distributed lag model indicate that cointegration exists between the oil prices and the stock returns. Results of asymmetric autoregressive distributed lag model confirm that both in the long run and the short run increase in oil prices have a negative impact on the stock returns of Shanghai stock exchange while decrease in the oil prices has a positive impact on the stock returns. The examined results of this study recommend that oil prices dynamically contribute incompetence in stock prices in such a way that impact the profits of investors in stock market.
In modern era crude oil is recognized an essential factor to manufacture any product in any economy, crude oil prices variations can affect the economy growth and development either in positive or negative way. Vo  stated that rise in oil prices causes to raise the production costs that causes to raise the inflation rate and high inflation rate in economy adversely affect the economic growth. Noor and Dutta  stated that oil prices is important element for an economy, variations and instability in oil price can adversely influence the share prices in stock markets. Ciner  stated that prices of oil can impact the stock returns either in positive or negative ways. Oil price causes to affect the examined cash flows by their consequence on the economic growth. The prices of oil can disturb the discount rate that is applied to worth the shares in the stock exchange by variation in inflation. Bouri  stated that raise in the prices of oil causes to raise the prices of the equity markets share that adversely affect the income of the investors which lead to instability in the financial markets and the economic activities in any economy. Mohanty et al.  stated that the raise in the prices of oil affect the company share prices positively or negatively. They stated that raise in the oil prices positively affect the revenue of crude oil manufacturing companies and this raise in the prices of oil causes to raise the income of the oil productions companies. On the other side Phan et al.  argued that raise in prices oil is very expensive for the enterprises; because oil is used for production of products. Whenever the price of the crude oil increases so it directly affects the consumer’s purchasing power in economy, raise in prices of oil can be in shape of petroleum products prices.
Jones and Kaul  scrutinized the impact of prices of oil on different countries shares market returns; they stated that the prices of oil adverse impact on the share returns. Sadorsky  stated that the prices of oil play very essential role in the economy growth; Vector auto regression was applied to scrutinize association of oil prices with the stock returns. The examined outcomes indicated that prices of oil have negative influence on the share returns. Hammoudeh and Li  stated raise in oil prices having significant effect on stock returns in countries that export oil to other countries. Basher and Sadorsky  argued that oil prices in emerging countries adverse impact on share prices of emerging countries. Nandha and Faff  scrutinized association of oil prices with share returns in thirty five different index and they pointed out that raise prices of oil adversely affect the returns of share in these indexes. Miller and Ratti  examined the association of oil prices with the share returns in different countries. The examined outcome indicated that raises in the prices of oil have an adverse relationship with share returns in different countries stock exchange. Chen  inspected the influence of high prices of oil on the share returns in stock exchange; examined outcome indicated that increases oil prices causes variations in emerging stock market’s returns. Lee and Zeng  scrutinized the asymmetric association of oil prices with stock returns in G7 countries stock exchange. They stated prices of oil have dissimilar effect share returns. Basher and Haug  studied association of oil prices with stock returns and the exchange rate in emerging countries; they stated increase in prices of oil have negative association with returns of stock in emerging stock exchanges. El-Sharif et al.  scrutinized relationship of stock returns with oil prices in London stock exchange; examined outcomes showed raise in the prices of oil positively impact stock returns.
This research utilized monthly and weekly time series data for analysis that is mainly obtained from Federal Reserve Bank of St. Louis https://fred.stlouisfed.org/ and yahoo finance https://finance.yahoo.com/, spanning January 2000 to December 2018, for prices of oil (WTI) and the Shanghai Stock exchange composite index respectively. The used datasets were composed in a legitimate manner, completely obeying with the terms of service of the both sources. By following Qaio et al. ; Botta et al. ; Ranco et al. ; Khan et al.  and Yun and Yoon  returns of both variables are calculated by taking the natural logarithm difference of stock returns of Shanghai stock exchange composite index and the (WTI) oil prices returns, as shown in the following Equations.
Where SSERM and OilpM are the returns of Shanghai stock exchange composite index and the oil prices (WTI) returns respectively, SSERMt and OilpMt are the today prices and SSERMt−1, OilpMt−1 are the previous day prices. Following is the basic linear model for returns of Shanghai stock exchange composite index and the oil prices (WTI).
In order to check asymmetry relationship among a set of variables, the nonlinear autoregressive distributed lag model can be applied. Asymmetric ARDL was developed by Shin et al.  for checking the positive and negative influence of the independent variables on the dependent variable in long run and short run. Non-linear ARDL is the asymmetric form of the linear ARDL model of Pesaran et al. . The uniqueness between ARDL and NARDL model is that the linear ARDL model does not study the option of negative and positive variations of the independent variables that have different effect on the dependent variable. The NARDL model not only permits to identify the presence of nonlinear relationship that independent variables may have on the dependent variable, but NARDL model also allows for checking cointegration in a single equation framework. NARDL model have some advantages as compared to other cointegration model this is applied mostly for time series data, such as its elasticity about the order of integration of the variables involved, stationarity is not problem for NARDL model but it is required to check that any variable is not stationary at I(2) stated by Pesaran and Pesaran  and Ibrahim, the option of checking the hidden cointegration among the dependent and independent variables, avoiding to ignore any association which is not noticeable in a conventional linear model and a better performance in small samples. To assist the interpretation of the NARDL model, we first used the expression of the linear (ARDL) model given by the following model.
Table 1 indicates the results of unit root test. ADF test and PP test were utilized to examine the stationarity of variables. Stationarity of variable is essential to be check before applying ARDL model that any series is not stationary at I(2) otherwise the outcomes will not be correct. Ouattara  stated that the ARDL results will be incorrect if any of the series are stationary at I(2). Examined outcomes of ADF and PP specify oil prices and the stock returns are stationary at I(0) and I(I). Both tests results showed that ARDL bounds test can be applied because any variables are not stationary at 1(2).
This research scrutinize the asymmetric effect of oil prices on stock returns in Shanghai stock exchange by using monthly and weekly time series data from January 2000 to December 2018 for examination. Asymmetric ARDL model were applied to scrutinize the short and the long run association between the study variables. Previously research used linear cointegration model to examine the long run and the short run association, but we study the non-linear long run and short run associations between the study variables, because it necessary to check that what is the influence of raise and fall in oil prices on the stock returns. It is essential to examine the stationarity of each variable that none of the variable is stationary at I(2) before applying asymmetric ARDL model. ADF and PP were applied to check the stationarity of each variable and the examined results confirm that any variable is not stationary at I(2). Asymmetric ARDL is better as compared to other cointegration method because in asymmetric ARDL model different lags for variables can be applied. AIC is used for lag selection because the calculated value of AIC is the minimum as compared to other lag selection criterion. The examined results of the asymmetric long run and short run indicate that when the oil prices increase so it has an adverse influence on the stock returns while a negative change in oil prices have a positive impact on the stock returns. Results of weekly change in oil prices indicate symmetric impact on stock returns, both increase and decrease in weekly oil prices negatively impact the stock returns. Furthermore, it is pointed out that the information apprehended by the changes in oil price can be applied to describe possible asymmetric reaction in the developing countries stock markets. Oil prices play very important role in financial market. The movement of oil prices impacts the behavior of investor that impact the stock prices either in positive or negative way that causes uncertainty on the economy growth. The results indicate that association between oil prices and stock returns in China rely on policies uncertainty. It is necessary for policy makers to organize such strategies that help to reduce the oil shocks harmfulness on financial market. For instance, employing alternative energy resources can decrease the dependence on oil for production purposes. It is very important for investors to know asymmetric association to make appropriate investment decisions because it will qualify investors to decide profit generating stocks at right time to invest. Moreover, investors also need to observe the economic situation and their exposure to the stock market.