The lithium and oil markets – dependencies and volatility spillovers

Abstract

Lithium is one of the rare raw materials needed to produce high-capacity batteries. Electric cars, said to be the future of automobility, have already begun to replace oil and gasoline-powered cars. This paper analyzes price sensitivity of the world’s largest lithium producers in U.S. and China to the Brent crude oil price changes. Since there are no direct ways to invest in lithium commodity, investors might gain exposure to lithium prices thorough investments into lithium mining companies. We focus on the time-varying dependency between returns of lithium producers and Brent crude oil as well as the potential volatility spillover effect between lithium and oil. We find that returns of American lithium mining stocks are in general weakly correlated to the changes of oil prices, but they are still more strongly correlated than the returns of Chinese companies. The dynamics of correlations are similar within a market, but different across markets. The tail dependence is the strongest for the pairs of American and pair of Chinese companies, but no dependence is found for oil and lithium producers. From the portfolio management perspective oil and lithium stocks are good diversifiers, but as the correlations are time-varying such outcomes are temporary.