On interdependence structure of China's commodity market

Abstract

This paper aims to provide insight into the interdependence structure of a set of commodity sectors in China. Using daily data of China's commodities from August 2004 to April 2019, we explore the cross-sector connectedness as well as contemporaneous causal relationship of China's commodity market at the sector level. The results indicate that a large proportion of the fluctuations in China's commodities is attributed to the cross-sector connectedness. However, the patterns of connectedness behave differently across sectors in the commodity market. In particular, the net connectedness indices enable us to assess whether each sector is a transmitter (receiver) of the shocks. In addition to a large variation of connectedness over time, the spillover effects across sectors increase during unstable periods. When examining the time-varying net directional connectedness, we demonstrate that most sectors frequently switch between a net transmitting and receiving role depending on sector-specific effects over time. Moreover, the paper provides novel evidence of the contemporaneous structure of causal relationship among China's commodities, while the roles in the shock transmission in contemporaneous time differ greatly across sectors. Our findings have significant implications for diversification as well as economic policymaking.