Regional Conflict and Financial Market Reaction: Evidence from China and US

Abstract

The conflict between Russia and Ukraine at the start of 2022 has largely influenced the global market, both the commodity market and stock market. Russia, as a major exporter of oil, has been sanctioned by the western countries which led to a sharp rise in the price of the crude oil. And the global capital market was affected consequently. This paper uses the Shanghai Stock Exchange Composite and the Shenzhen Stock Exchange Component Index in the Chinese market, and the Dow Jones Industrial Average, the Standard & Poor’s, and the National Association of Securities Dealers Automated Quotations in the American market to assess the impact of the geopolitical risk. Using these indices, this paper builds a VAR model to analyze the interaction of the index value and the oil price within a system, and to predict the further influence of the fluctuation in the price of the crude oil on the security market. An ARMA-GARCH model is also built to find out the change in stock market volatility induced by the oil price. This paper finds that the war-induced rise in the price of crude oil has a negative impact on the return of the security market both in China and the US while having little influence on the volatility.