Reconciling the Energy-Exposure and Sectoral-Risk Hypotheses: Spillover Effects of Oil Shocks to Clean and Dirty Chinese Stocks

This paper develops a new direction of study oil-shocks with two competing hypotheses: (i) the Energy-exposure hypothesis, which posits that clean stocks with less direct reliance on fossil fuel should be less sensitive to oil shocks; and (ii) the Sectoral-risk hypothesis, which argues that dirty stocks are less sensitive to oil shocks because they exhibit more defensive characteristics and can act as safe-haven assets during oil-induced market stress. Our study constructs clean and dirty portfolios based on firm-level carbon intensity for stocks in the Hang Seng Stock Connect China A 300 (HSCA300) Index, decomposes oil shocks into supply, aggregate demand, and oil-specific demand components, and measures return and volatility spillovers with the connectedness framework. The results show that directional spillovers from all three types of oil shocks to the clean portfolio generally exceed those to the dirty portfolio in both returns and volatility, supporting the sectoral-risk hypothesis. However, volatility spillovers from oil-specific demand shocks are stronger for the dirty portfolio, aligning with the energy-exposure hypothesis.