Linkages between Energy Prices and Energy Stocks in China: A Study Based on Wavelet Analysis

Abstract This study constructs a comprehensive energy price index and applies the Morlet continuous wavelet transform to investigate the relationship between energy prices and energy industry stock markets. It also tests the multi-scale linear and nonlinear causality using multi-resolution decomposition. The empirical findings indicate that: (1) energy prices and stock market volatilities demonstrate a stable negative correlation in the medium- and long-term frequency domain, and the fluctuation of energy stock prices precedes that of energy prices since 2018. (2) Energy prices and stock markets exhibit bidirectional causality. The short- and medium-term driving effects of energy stocks and energy prices are more pronounced than the overall change in stock markets over a period of 16 months. The linkage between energy prices and stock markets is primarily influenced by the stock market leading and driving energy price changes, indicating a common long-term trend. (3) In the long run, fluctuations in Chinese stock markets will lead to a reverse change in energy prices, providing policy management in the energy industry with an effective reference. However, the unstable short-term characteristics and lag of energy price changes suggest that the impact of energy prices on stock market investment has less reference value.