Abstract
Commodity futures markets play an important role, through risk management and price discovery, in helping firms make sustainable production and marketing decisions. An important related issue is how pricing signals between futures exchanges impact traders’ risk. We address this issue by shedding light on risk transmission between the most mature (U.S.) and the fastest growing (Chinese) commodity futures markets. Gaining greater insight of risk transmission between these key markets is vitally important to firms engaged in the efficient and sustainable trade of commodities needed to feed the world. We examine the risk transmission between Chinese and U.S. agricultural futures markets for soybean, corn, and sugar with a Copula based conditional value at risk (CoVaR) approach. We find significant upside, and to a lesser extent downside risk transmission, between Chinese and U.S. markets. We confirm the dominant pricing role of U.S. agricultural futures markets while acknowledging the increasing price discovery role performed by Chinese markets. Our results highlight that soybean markets exhibit greater risk transmission than sugar and corn markets. We argue that our findings may be explained by Chinese government policy intervention, and by the large role played by U.S. firms in the underlying cash commodity markets–both in terms of production and trade.
Highlights
Over the last five years trading volume on the two largest Chinese agricultural commodity futures markets—Dalian Commodity Exchange (DCE) and Zhengzhou Commodity Exchange (ZCE)—has grown at a remarkable rate
First with respect to both soybeans and sugar, it is evident that upside risk transmission is greater than downside risk transmission irrespective of where the risk emanates—the U.S or China
Turning to our corn results, we again find that upside risk transmission form U.S to China is larger than downside risk, but that the reverse is true when analyzing risk transmissions from China to the U.S Generally, our risk transmission results are consistent with our tail dependence results, which show that all the upper tail dependencies are larger than the lower tail dependencies
Summary
Over the last five years trading volume on the two largest Chinese agricultural commodity futures markets—Dalian Commodity Exchange (DCE) and Zhengzhou Commodity Exchange (ZCE)—has grown at a remarkable rate. Over the same period, annual traded volume at the ZCE increased by 20% from 525.3 to 901.3 million contracts. The more mature U.S futures markets, which list agricultural commodities, the Chicago Board of Trade (CBOT) and Inter Continental Exchange (ICE U.S.), have experienced slower or declining growth respectively in annual trading volume. Annual trading volume in agricultural commodities at CBOT represented 1.5 and 2.1 times the annual trading volume at DCE and ZCE respectively in 2013, by 2016 annual trading volume at DCE had exceeded CBOT levels and the comparative difference between CBOT and ZCE had fallen to 1.5.
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