Yuanhao, Zhu
(2022)
A study of risk spillover effects of nonferrous metal futures across markets - Empirical evidence from China and UK markets.
[Dissertation (University of Nottingham only)]
Abstract
Due to the increasing globalisation of the economy, interconnections of economic systems in different countries and regions are becoming more frequent and the speed of risk transfer is increasing. As the London and Shanghai exchanges are among the larger futures exchanges in the world, representing the UK and Chinese futures markets respectively, the risk spillover between the two markets is also of concern. Nonferrous metal futures are among the earlier developed and faster maturing futures varieties of global commodity futures. Nonferrous metal futures on the London Metal Exchange are considered the world's recognised pricing standard. Chinese nonferrous metal futures have also become more actively traded in recent years and have gradually increased in stature in the international futures market. The linkage between the UK nonferrous metals futures market and the Chinese nonferrous metals futures market is also becoming stronger, so it is particularly important to study the risk spillover effects between the Chinese and UK nonferrous metals futures markets.
This paper analyses daily closing price data for the UK LME index and the IMCI in China, copper, aluminium, zinc and lead nonferrous metal futures in the UK and China by building a GARCH-Copula-CoVaR model. The direction and magnitude of risk spillovers between the UK nonferrous futures market and the Chinese nonferrous futures market are analysed. This paper mainly uses Matlab for data processing and the data source is Wind database. In the empirical part of the study, the normality test and the stationarity test are passed respectively. The marginal distribution and VaR are obtained through the GARCH (1,1) model, and the marginal distribution data are fitted through the selection of the optimal Copula. CoVaR, ΔCoVaR, %CoVaR of nonferrous metals across markets are calculated with GARCH-Copula-CoVaR model.
The main conclusions from the empirical study are as follows: from a static perspective, the risk spillover effect of the UK nonferrous metals futures market on the Chinese nonferrous metals futures market is greater than the risk spillover effect of China on the UK. The ranking of the size of risk spillover from the UK to China's nonferrous metal futures are, respectively, lead, zinc, aluminium and copper. From a dynamic perspective, the dynamic risk spillover effect between the UK and China nonferrous futures markets is positive in both directions, with risks arising in the London nonferrous futures market accelerating risks arising in the Chinese nonferrous futures market and vice versa. There is a large correlation between the realistic price volatility of the two markets. Based on the research, this paper puts forward recommendations to improve the trading system, construct a risk management model and improve the market perception of futures participants, which are important for the regulation and sustainable and healthy development of the UK and Chinese nonferrous metals futures markets.
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