Table of Contents.

Table of Contents. __________________________________________________________2

Part A: Individual Research Paper. _____________________________________________3

I. Abstract. _________________________________________________________________ 3 II.

Introduction. ______________________________________________________________ 3

III. Literature Review.__________________________________________________________ 4

Definitions & Theoretical Reviews._________________________________________________________4
Volatility Spillover Effects of Energy Sector – Oil Market to China Stock Market. ____________________4
1. Spillover Effect in different periods: Before, during, and after Recession & The Mediator Function of The
Exchange Rate of RMB against USD. ________________________________________5 2. Explanation for The
Asymmetric Volatility Spillovers between Global Oil & China Stock Markets during Recession.
____________________________________________________________________7 3. Short & Long-term
Volatility Spillover Effect between Global Oil and China Stock Markets. ____7 Implications &
Recommendations._________________________________________________________8

IV. Limitation. ________________________________________________________________ 9 V.

Conclusion. _______________________________________________________________ 9 Part B:

Industry Talk Reflection. ______________________________________________10

References. _______________________________________________________________12
 2

Part A: Individual Research

Paper. I. Abstract.
To gain a deeper insight into the volatility spillover effect, thus, supporting the evaluation of
Covid-19 to financial markets generally, specifically between the international oil and China
stock market, the research paper has examined the spillover effect under three perspective:
Time periods (Before, during, and after recession), the asymmetry in volatility spillover effect
(Positive & negative), and duration (short & long term). The results have shown that the
connection between the global oil and China stock market has been enhanced during and
after recession as well as there is the asymmetry in the spillover effect, in which the bad
volatility spillovers prevailed over the good ones due to the negativity among Chinese
investors and the uncompleted development of China stock market. However, in the long
term, China can still involve in the variation of the international oil market as the second
greatest economy in the world with the highest oil consumption and a reformed stock
market.

II. Introduction.

In equity market, there have always existed connections between the volatilities in stock’s
yields and other industries, in which a variation in stock’s price is contributed by multiple
components and spills over to other sectors, illustrating the highly-sensitive synchronization
across sectors in the economy, can be explained by two key factors: the interaction among
different industries and investor behaviors (Yin, Liu & Jin 2020). Since the globalization
started, financial market fluctuations have occurred more frequent and been more acute
(Caporale, Gil-Alana & Tripathy 2020). Hence, there have been various studies about
volatility spillover effects in financial markets, in which asymmetric volatility has also been
recorded and confirmed to be more sensitive to negative returns and incidents (Chen, Y, Li &
Qu 2019). Particularly, various industries including energy, raw material, real estate, etc. all
have an
impact on Shanghai stock market, thus, reflecting the market’s overall performance in many
sectors (Yin, Liu & Jin 2020). Specially, oil futures market influences Shanghai stock market
both direct and indirectly through macroeconomic components and exchange rates, creating
 diverse and distinct connections among them and various markets (Wei et al. 2019).

3
Moreover, investor behavior also plays a role in determining Shanghai stock market’s
sensitiveness (Chen, Y, Li & Qu 2019), thus, effecting the asymmetry of volatility spillover
effects on the stock market.

As the existence of various relationships among different sectors in the stock market, causing
diverse volatility spillover effects in the stock market both directly and indirectly through
many indicators, the research paper aims to go further on details about their connections as
well as the volatility spillover effects and investor behavior impacts, specifically China Oil
Market’s volatility spillover effect to its Stock Market – the largest net energy importer and
also the one of biggest equity markets having a disputable impact on the global economy,
thus, provide a deeper understanding about how these links are created, work, and influence
in the stock market. On the other hand, the analyzed time phrase chosen in the research
project is around the Financial Crisis – a global passed recession, hence, describing a more
completed and detailed picture as well as data and analysis, thus, able to provide a closer
view and understanding of the volatility spillover effect between oil and stock market in
china specifically and global generally in all 3 phrases: before, during, and after recession as
well as its spillover effect asymmetry and influences in both short and long run.

III. Literature Review.

Definitions & Theoretical Reviews.

Volatility spillover effect is defined as a “variable’s second-moment relationship”, in which a
market’s volatility is not only impacted by its own but also get influenced from the volatility
in other markets (Xiong & Han 2015). Thus, depend on whether the trait of the spillover
effects is positive or negative and which one having the predominant influence on the
markets, the asymmetry of the volatility spillover effect is determined.

Volatility Spillover Effects of Energy Sector – Oil Market to China

Stock Market.
Being the largest net energy importer with a 423-billion-USD mineral-product import bill in
2018 (Passport 2019) and 72% of foreign-trade dependence (Zhu, J, Song & Streimikiene
2020), China’s vulnerability to global oil volatility is higher than ever (Passport 2019) and
have a discernible influence on both China’s economy and financial market (Zhu, J, Song &

4
Streimikiene 2020). Consequently, there are a synchronization and similarities between
crude oil markets with various multiscale time delays, in which the correlation between
them will raise even higher after significant fluctuations in crude oil market, followed by
delayed reaction mechanism of stock markets (Zhang & Wang 2019). Hence, both of the
impacts of China oil price alternations on stock market and the delayed reaction mechanism
are worth for further detailed research.

1. Spillover Effect in different periods: Before, during, and after

Recession & The Mediator Function of The Exchange Rate of RMB
against USD.

Volatility Spillover Effect between Global Oil and China Stock Markets in different periods.
Overall, China stock market has shown a highly negative effects on most markets during the
volatility in the China Stock Market Crash in 2015-2016 as well as been recorded as more
sensitive to pessimistic returns and incidents, illustrating the asymmetric volatility tendency
(Chen, Y, Li & Qu 2019), also be described in the results of a nonlinear threshold
cointegration tests conducted by Wei et al. (2019), in which the samples was divided in to 3
phrases, showing the differences in oil future prices effect on China stock market these 3
periods: Pre financial-crisis period, during-financial-crisis period, and post-financial-crisis
period (Figure 1).

Figure 1: Non nonlinear threshold cointegration test results of 3 phrases (Wei et al. 2019).

Before the Financial Crisis, the cointegration coefficient of Brent crude oil price was -0.13
with 5.1% significant level, reflecting a minor negative influence on China Stock Market,
which is reasonable as higher oil price, a main cost for industry production, indicates higher
production

5
cost (Wei et al. 2019). In phrase II, both the cointegration coefficient and significant level
increased drastically to 4.183 and 1.21%, respectively, indicating the similar impacts of the
Financial Crisis on both China oil and stock market, triggering them to crash together (Wei et
al. 2019), signifying the time-adjusting of volatility spillover effect between China oil and
stock market as well as the tightened interdependence between these two market during
the crisis (Xu et al. 2019). After the Financial Crisis, the cointegration coefficient was back to
negative, however, with a greater absolute value compared to before the crisis (0.352 and
0.13, respectively), signaling not only the impact from the Financial Crisis has been eased
but also the influence of oil price to China Stock Market has come back to normal and been
even more stronger than before partly due to the improvement in China’s oil pricing
mechanism (Wei et al. 2019).

Explanations to The Differences of Volatility Spillover Effect during Recession. One of the
reasonsfor the enhanced correlation between oil price fluctuation and China stock market
during and after recession is the price variation in other markets due to the impacts from
uncertainties, other market price fluctuations will also occur according to the transmission
effect of the price and financial contagion effect (Zhu, J, Song & Streimikiene 2020).
Moreover, due to the rising responsiveness to global oil price variations of Chinese financial
market caused by the financial liberalization and financialization of commodity markets, the
adverse influence from international oil market volatility to China stock market is enhanced
(Ahmed & Huo 2020), posing a wider risk spillover to China stock market (Zhu, H et al. 2016).

Exchange Rate of RMB against USD & Mediator Function.

Interestingly, the exchange rate is the only one in the three macroeconomic indicators
chosen in the research that is able to keep its mediator function throughout three phrases
of the Financial Crisis – The impact indirect transmission from oil price to China stock
market, reflected by the its cointegration coefficient, having the highest absolute value (-
8.123 at 1%

significant level), after the recession (Wei et al. 2019). Furthermore, not only the RMB/USD
exchange rate but also exchange rate market holds a prominent position contributing to the
formation of the impacts from oil prices to China stock market in phrase III (Wei et al. 2019).
 6
2. Explanation for The Asymmetric Volatility Spillovers between Global
Oil & China Stock Markets during Recession.
There has been various research proving the existence of asymmetric volatility spillover
between oil and stock market both globally and in China specifically, in which the bad
volatility spillovers has surpassed the good volatility spillovers during the Financial Crisis
(Chen, Y, Li & Qu 2019; Wang & Wu 2018; Xiao et al. 2019; Xiao et al. 2018; Xu et al. 2019),
partly contributed by the pessimism of Chinese investors during the crisis. As China stock
market is still undeveloped, explaining for the irrational behaviors of Chinese investors (Wen
et al. 2015), thus, Chinese investors tend to be more sensitive to negative information than
positive one (Xiao et al. 2018), especially during recession, hence, triggering the investors to
sell their stocks and buy other safer financial securities, aggravating the situation (Zhu, H et
al. 2016), implying a higher volatility asymmetry caused by negative information (Chen, S et
al. 2020). Furthermore, Chinese investors also prefer speculation to investment, sometimes
creating a disparity in the stock prices and actual economic performance as well as the rising
sensitiveness of stock market (Chen, Y, Li & Qu 2019). Combing with the increasing herding
behavior tendency of Chinese investors during bearish market, a critical factor determining
the dependency between oil and stock market during recession, the insecurity in the market
is increasing even more (Xiao et al. 2019), donating to the dominance of bad volatility
spillovers from China oil to stock market.

3. Short & Long-term Volatility Spillover Effect between Global Oil and
China Stock Markets.
Generally, in the short-term, China oil price variations mostly contributes to the volatilities in
the stock market (Zhu, J, Song & Streimikiene 2020). However, in the long run, the
fluctuations in China economy generally and its stock market particularly have a considerable
impacts as well as a stronger and larger spillover effects on the international oil market (Zhu,
J, Song & Streimikiene 2020).

Being the largest net energy importer (Passport 2019), whose production and growth of
various industry highly depends on crude oil, China still remains a passive bearer of the
global oil price adjustment as having no authority in international oil pricing, signifying a
relatively noticeable spillover effect from international oil market to China stock market
(Zhu, J, Song &
 7
Streimikiene 2020). Moreover, due to the great amount of randomness in the short-term
investment, highly influential volatilities are distributed more in the long-term (Liu & Jiang
2020). Hence, a weaker and smaller spillover effect from global oil market to China stock
market in the short-term is indicated.

On the other hand, as a biggest energy consumer (Passport 2019) with 72% of foreign-trade
dependence (Zhu, J, Song & Streimikiene 2020), whose developments and response abilities
of various industries are shaped by the international oil price fluctuations, hence, implying a
strengthened variation tendency and connection between global oil price volatility and China
stock market in long-term (Zhu, J, Song & Streimikiene 2020). However, also being the
second biggest economy in the world with the consolidation of financial attribute to oil
market, the strengthened position of oil market variation to China stock market, and the
reform of China stock market and oil pricing mechanism after the Financial Crisis, China can
interfere and influence in the international oil market, thus, perhaps leading to the direction
renavigation of the long-term volatility spillover effects (Zhu, J, Song & Streimikiene 2020).

Briefly, compared to the short-term, the long-term spillover effect between international oil
market is both more critical and larger. Besides, as a second influential entity in the global
economy, there is possibility that China can have a greater authority to interfere in the
international oil market in long term.

Implications & Recommendations.

As the spillover effect between oil future prices and China stock market can be indirectly
transferred in all three phrases: before, during, and after recession by the exchange rate of
RMIB against USD specifically and the Forex market generally, investors as well as policy
makers should consider about the variation in exchange rate and oil price, thus, able to
evade or ease the risk of any severe volatility transmitted to the stock market (Wei et al.
2019). Moreover, perceiving the asymmetry in the volatility spillover effect caused by the
negativity of investors during recession (Caporale et al. 2020), they can also predict the
upcoming threats based on the developments of the financial markets, in which market
participants’ responses should be considered prudently whether they are mainly positive or
negative (Chen, Y, Li & Qu 2019). Furthermore, the policy makers can alleviate the intensity
of market uncertainties as well as measure the level of market fluctuations and future
effectiveness of
 8
implemented policies by releasing good news & public reactions determination (Chen, Y, Li &
Qu 2019). Finally, China needs to enhance its stock market basic mechanism as well as the
response one to risks in the information flow from oil market to China stock market as its
continuously strengthened long-term relationship and dependency on oil market (Xiao et al.
2019).

IV. Limitation.

Although volatility spillover effect is not limited in only between oil and stock market but
actually occurs in various sectors in the economy as well as differentiates in each industry,
each country, and each period, this research paper is only able to cover the spillover effect
between China oil and stock markets during financial crisis, thus, not able to provide a fully
completed overlook about the volatility spillover effect in China or globally. Secondly, with
the absence of statistic research methodology, the paper could not confirm whether there is
any conflict in the findings of the referenced research with actual results in practical.

V. Conclusion.

Briefly, the financial crisis has changed and reinforced the correlation between global oil to
China stock market, in which the negative volatility spillovers have dominated the positive
ones due to the pessimism of Chinese investors and the immaturity of China stock market.
Moreover, despite having to endure the short-term spillover effect from the international oil
market as a largest net energy importer with no rights in influencing the international oil
pricing, China can still impact the global oil market in the long run asthe second biggest
entity in the global economy with the highest oil demand. Finally, to anticipate the
upcoming variations and reduce the severity of any volatility from global oil transmitting to
China stock market, both Chinese investors and policy makers should observe the
adjustment in the exchange rate of RMB against USD particularly and the Forex market
generally as well as the developments and public responses in the financial markets.
 9

Part B: Industry Talk Reflection.

Mr. Vu Binh Minh – Vice President of HSBC has shared his experience of working as a
member of global team market, particularly a rate trader. Generally, there are three roles in
global market team: Trading, Sale, and Sheet Balance Management. As trader, you will be in
charged in two positions: Forex and bit rate trading. Besides, for the sale position, there are
two subgroups: Corporate Sale Team, responsible for working with MNCs and other medium
enterprises, and Institutions Team, whose customers are specific organizations with more
sophisticated roles in the financial market. Finally, it is SBM team taking part in managing the
funding & direction of asset and liability of the bank.

As an experienced trader, Mr. Minh has shared quite lots of valuable experience, which is
what have made the trading job is so attractive to him. One of these reasons is the
indisputable importance of the trading job – maintaining bank’s investment portfolio and
profits requirement, also satisfying customers’ goals. Secondly, the diverse experience the
job offering is also an appealing point, in which you have the opportunity to get in touch
with various people with various portfolios and purposes. Moreover, it is a distinctive role
also because of its significance. Traders are responsible for nearly one third of the bank’s
revenue, however, is also one of the teams with the least members. Furthermore, they are
also the people having the direct impacts on the financial markets as the one deriving the
value of the assets. Dynamism is also another of its attraction, in which the environment you
work is continuously changing and transforming day by day. Finally, it is the job’s intensity,
which is the most appealing aspect in my personal opinion. Not only having to follow each
deal you have conducted from the beginning till the end with various clients with various
backgrounds and objectives, but traders also have to cooperate closely with sale team to be
able do derive your idea to the customers. Overall, it is a highly dynamic job requiring not
only the professionalism and quantitative skills but also interpersonal skills and an eager-to-
learn attitude.

As a freshman with not much practical experience of working in any positions in the financial
market, what Mr. Minh has shared is really helpful as an insight into these jobs in reality,
specially how they are differentiated in Vietnam compared to other countries, thus,
 10
determining my career direction more appropriately to not only my ability but also my
personality traits, in which trader may not a suitable position to an introvert not having good
interpersonal and multi-tasking skills like me.

Wordcount: 24 9 3
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