Research On Dependence Of Chinese Commodity Futures And Equity Markets

Commodity futures has become an important choice for investors who consider to make portfolios,as Chinese commodity futures market develops fast and are of great maturity.The degree of correlation between commodity futures and equity market not only determines the benefit of investment diversification,but also affects the investors1 hedging and risk management strategies.The common multivariate GARCH model or Markov Switching Model is difficult to describe the asymmetric tail dependent behavior when studying the dependence among two or more different markets.This paper analyzes the dependence between Chinese commodity futures and equitys,especially the tail behavior of the two markets.Author uses the method of bivariate Copula to construct the dependence structure among the domestic CSI300 Index and five main commodity futures index.By comparing the risk metrics between different allocation strategies of future-equity portfolios and pure equity portfolio,author tests the dependence relationship and the tail dependence which are useful when dealing with the downside risk management.It is shown that equity investors could avoid the extreme losses by shorting the commodity futures by taking advantage of the lower tail dependence.The different dependence degree of futures-equity would lead to different risk-aversion benefits.The empirical results confirmed the asymmetric tail dependence of commodity futures market and equity market,while the correlation is low.It indicates that the two markets have had a certain degree of integration.It is also verified that the Copula models fits the dependence structure,and are effective in measuring the portfolio risk.