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Return and volatility linkages between international energy markets and Chinese commodity market

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  • Sun, Guanglin
  • Li, Jianfeng
  • Shang, Zezhong

Abstract

This research investigates the return and volatility linkages between international energy markets and Chinese commodity market at the micro and macro level by employing the Vector Autoregressive combined with BEKK Autoregressive Conditional Heteroskedasticity model (VAR-BEKK-GARCH). Furthermore, this paper also analyzes the changes in return and volatility linkages stepping across the China's exchange rate regime reform in 2015 by splitting the sample into 2 stages: the Pre-reform period (19 June 2010-10 August 2015), and the Post-reform period (11 August 2015-31 December 2021). The empirical results show significant return and volatility spillovers between the international energy markets and China's commodity market, nevertheless, the return spillover effects has been weakened significantly and the vaolatility spillovers have been strengthened significantly after the 2015 China's exchange rate regime reform. The empirical results also provide evidence that the international energy market can effectively hedge the risks of China's commodity market, but the portfolio diversification strategies should be modified across time. Due to the decline in price co-movement, investors have been able to hedge risk in China's commodity market at a lower cost since the reform of the RMB exchange rate system in 2015. However, the efficiency of risk diversification has also declined due to the increased risk linkage between domestic and international markets. In the future, if another reform of the exchange rate system is ought to be initiated, price shocks coming from the external energy markets as well as the risk linkages are all factors needed to be taken into control. Finally, our research also provides a clear way for investors to hedge domestic commodity market risk through international energy markets.

Suggested Citation

  • Sun, Guanglin & Li, Jianfeng & Shang, Zezhong, 2022. "Return and volatility linkages between international energy markets and Chinese commodity market," Technological Forecasting and Social Change, Elsevier, vol. 179(C).
    • Handle: RePEc:eee:tefoso:v:179:y:2022:i:c:s0040162522001743
    DOI: 10.1016/j.techfore.2022.121642
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