Shanxi Reservoir is one of the most seismically active areas in Zhejiang Province, Eastern China, making it a natural experimental site for reservoir earthquake research. We apply the fluid substitution method to the study of reservoir earthquakes. Firstly, we estimate the distribution of seismic wave velocity and wave velocity ratio around Shanxi Reservoir based on the seismic phase observation reports. Then, based on the rock physics models and techniques, we estimate the porosity and saturation distribution around the reservoir using wave velocity and velocity ratio results, and analyze the permeability conditions of underground rocks. Further, using the earthquake catalog, we estimate the spatial distribution of b-value and stress field characteristics in the area. Finally, we discuss the influence of reservoir impoundment and underground lithology on seismicity and speculate on the mechanism of earthquake occurrence. The main conclusions are as follows: (1) When earthquakes occur, the rocks that rupture are essentially saturated; the earthquake magnitude of the region, where the rocks rupture before they are fully saturated, is relatively small. (2) The porosity of the SE segment on seismogenic fault F11 (Shuangxi–Jiaoxiyang fault) is greater than that of the NW segment. (3) After the reservoir impoundment, the water first infiltrates in the middle to SE segment of the F11 fault, which has large porosity, causing the pores within the rock to reach water saturation and inducing initial seismicity. The occurrence of initial earthquakes creates new infiltration channels, which makes the reservoir water infiltrate northwest along the fault. Therefore, the NW segment began to become active, resulting in the 2014 earthquake sequence. (4) The 2014 sequence started in the region with large porosity differences and small b-values. Large differences in porosity tend to result in large differences in local water pressure, coinciding with the large stress reflected by the b-value; this region became the most unstable location on the NW segment, and the underground rocks were the first to reach the yield limit and rupture.