Purpose
This
paper aims to examine the evidence of risk spillovers between Shanghai and
London non-ferrous futures markets using a dynamic Copula-CoVaR approach.
Design/methodology/approach
With
daily data, the marginal distributions and optimal Copula functions are
determined using the kernel estimation method and squared Euclidean distance
test. The conditional value-at-risk and the conditional value-at-risk spillover
rate are computed from the Copula estimated parameters based on the
Copula-CoVaR model. Also, the dynamic correlation coefficient between the two
futures markets is investigated.
Findings
The
empirical results are as follows: overall, the risk spillover effect exerted by
the London Metal Exchange on the Shanghai Futures Exchange is more significant
than vice versa. Moreover, the degree of risk spillovers exerted by the London
Metal Exchange on the Shanghai Futures Exchange for zinc and copper are more
significant when they are depressed in the London Metal Exchange. Moreover, the
dynamic of the correlation between the Shanghai and London futures markets is
attributed to be largely due to changes in the global economy.
Research
limitations/implications
The
Copula-CoVaR model used in this paper is suitable for measuring the risk
spillovers between two different markets, while the risk spillovers across
multiple markets or the consideration of multiple risk factors cannot be
accurately captured using this framework. Multiple state variables to capture
time variation in the conditional moments of return series will be a topic in
future research.
Practical
implications
The
results provide theoretical support for risk management and monitoring of the
non-ferrous futures markets.
Originality/value
The
ability of the Copula function to accurately describe a nonlinear relationship
and tail correlation is harnessed to measure the risk spillovers, explore the
degree and direction of risk spillovers and identify the source of risk
spillovers. The global economy is incorporated as a macro factor to explore its
inner connection with the dynamic of risk spillovers in the non-ferrous metal
futures market.
The latest version of the paper in PDF format is available at International Journal of Emerging Markets, 16, 2021.