Modeling the nexus of crude oil, new energy and rare earth in China: An asymmetric VAR-BEKK (DCC)-GARCH approach

Abstract

This study investigated the volatility spillovers and dynamic correlations between international crude oil, new energy and rare earth markets in China, given China's dominating position in rare earths production/processing and the investable-commodity quality of rare earths. Furthermore, the asymmetric effects of volatility spillovers were also explored. The VAR-asymmetric BEKK-GARCH model and DCC-GARCH model were estimated on the basis of daily data, ranging from 2012 to 2018. The empirical results indicated that there was an indirect way through which volatility may transfer between oil and new energy markets, as cumulative risk originated in one market may transmit to another through the rare earth market. Consequently, the establishment and development of rare earth futures may be beneficial to risk control in financial markets. Besides, the dynamic correlations between the rare earths and new energy markets remained at a high level during the study period, which is consistent with rare earths usage in new energy applications.