Abstract
The China’s crude oil futures market (INE market), as it was first launched in late March of 2018, quickly draws much attention from global investors. In reference to the high frequency data, this research explores how well this new product reacts efficiently to international influences and to what extent it can be integrated with traditional benchmarks such as WTI and Brent. The multivariate GARCH models are employed to capture the cross-market time-varying correlations, return and volatility spillovers, which are modified by incorporating the detected structural breaks in the return dynamics to improve the accuracy of model estimates. Empirical results indicate a strong integration of INE market with these international benchmarks. A high but time-varying correlation is observed with recurring highs around 0.7. Spillover effects have included significant bidirectional return and volatility spillovers between the INE and the international benchmark markets. Secondly, INE market appears to interact better with the Brent market than with the WTI market. Thirdly, structural breaks can influence correlations, the portfolio weights and hedge ratios. Lastly, the correlation between crude oil futures markets decreases significantly during the periods when structural breaks caused by economic and/or geopolitical events are identified. These findings have important implications in policy makings and economic decisions on portfolio management and hedging strategies.
Highlights
Crude oil is a crucial source of energy resource for economic growth and national security, and one of the most valuable assets traded in the international commodity markets (Ding et al, 2017; Ma et al, 2019; Xu et al, 2019)
The present paper aims to model the Chinese newly introduced crude oil futures under global influence and assess the extent to which this product integrates with international benchmark markets, namely West Texas Intermediate (WTI) and breakpoints in INE return and WTI (Brent)
This paper focuses on two types of integration: the commonality of oil return movements over time among different markets and crossmarket information transmission that measures through return and volatility spillovers
Summary
Crude oil is a crucial source of energy resource for economic growth and national security, and one of the most valuable assets traded in the international commodity markets (Ding et al, 2017; Ma et al, 2019; Xu et al, 2019). Reference benchmarks for crude oil prices have been dominated by the West Texas Intermediate (WTI) and the European Brent markets (Mensi et al, 2014). As the first international futures product induced in China, the INE futures is traded to overseas investors and has attracted much attention by overseas institutions and investors. The success of this international product will depend on how well it will integrate with existing international crude oil futures markets. The present paper aims to model the Chinese newly introduced crude oil futures under global influence and assess the extent to which this product integrates with international benchmark markets, namely WTI and Brent
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