How does China's crude oil futures affect the crude oil prices at home and abroad? Evidence from the cross-market exchange rate spillovers

Abstract

This study explores the cross-market relations among the prices of China's crude oil futures launched by the Shanghai International Energy Exchange (INE), China's domestic and foreign crude oil spots, and the USD against the RMB (USD/CNY) exchange rate. We emphasize the research of whether and how the RMB-denominated INE crude oil futures affect the exchange rate spillovers to China's domestic and foreign crude oil markets. With the construction of a theoretical framework and a Time-varying Parameter Structural Vector Autoregression Model with Stochastic Volatility (SV-TVP-SVAR) model, we find that: (1) The INE crude oil futures prices have close linkages with China's domestic crude oil spot prices but have insignificant and unstable spillovers on international crude oil prices, indicating that INE crude oil futures still have limited outward influence. (2) More importantly, the oil price-exchange rate nexus is diversified under different crude oil pricing currencies. The USD/CNY exchange rate shocks have negative spillovers on international crude oil denominated by USD while having positive spillover effects on INE crude oil futures denominated by RMB. (3) The USD/CNY exchange rate also positively influences China's domestic spot market via the spillovers of INE crude oil futures.