Extreme risk measurement for the oil and China’s sectors system—network-based approach and machine learning methods

Abstract

China is a large oil-consuming country, and sharp fluctuations in oil prices are bound to be detrimental to the stable growth of its economy. Therefore, accurately grasping the impact of the oil market on China’s sectors is the key to ensuring its healthy economic development. The article aims to explore the extreme risk transfer link of the oil and China’s sectors system, focusing on uncovering the risk spillover mechanism of the oil and providing early warning on it. We apply the TENET method to discuss risk propagation relationships within the oil and sectors system at three levels. The TVP-VAR model is brought in to recognize the factors affecting risk spillover in the oil market from the network correlation perspective. Finally, early warning of oil risk spillover is provided by incorporating the influencing factors into a machine learning model. The outcomes indicate that the risk connectivity of the oil and China’s sectors system is highly correlated with extreme events. There are variations in the spillover effects of oil market risk on different sectors, with Telecommunication Services, Utilities, Financials and Major Consumer sectors being the main bearers of the oil risk shocks. Overall, oil risk spillovers are mainly driven by economic policy and geopolitics, but oil price uncertainty is found to have a persistent impact on oil market risk spillovers in the dynamic analysis. Random forest model can provide effective early warning of oil risk spillovers. In addition, the significance analysis shows that oil price uncertainty and inflation are important factors affecting oil risk spillovers and are nonlinearly correlated with them.