Volatility Spillover Effects Of Commodity Sectors In China

Commodities are the basic materials for my country’s development and construction.The fluctuation of commodity prices has increasingly affected my country’s economy.At the same time,with the advancement of commodity financialization,commodities have become a popular tool in investment portfolios,and systemic financial risks transmitted across sectors are becoming more and more significant.Preventing abnormal fluctuations in commodity market prices and risk resonance has become the meaning of the problem.This paper investigates the structure of network linkages of a set of commodity sectors(including petrochemicals,energy,soft goods,non-ferrous metals,oils and grains)in China.Using daily data of China’s commodities from August 2004 to April 2019,we first explore contemporaneous causal relationships across sectors via the DAG analysis.Then we further examine the intensity and direction of volatility connectedness across sectors within the framework of network topology based on the TVP-VAR models from both static and dynamic perspectives.Empirical research results show(1)The empirical result of DAG analysis shows that the sectors of energy and petrochemicals are exogenous sources of volatility spillovers,and dominate the network of simultaneous shock transmission.The sector of oil & fats plays a role as the exchange center in the network,which is not only a source of volatility spillover to some sectors in contemporaneous time,but also receives shocks from other sectors.(2)Based on the TVP-VAR model,the total spillover index shows that a large proportion of the volatility is due to the cross-sector connectedness of commodity market,which indicates a high degree of comovements of commodity sector prices in China.And the empirical result provides evidence that the sectors of oil & fats and non-ferrous metals are main transmitters of the volatility in China’s commodity market,whereas the sector of softs acts as the main volatility receiver.The dynamic structure of total and directional volatility connectedness shows obtaining evidence of a large variation of connectedness over time.Moreover,the volatility spillovers of each commodity sector from(to)others vary greatly across sectors during the whole sample period.Base on the time-varying net directional volatility spillovers we document that volatility spillover across sectors increases during unstable periods.In contrast,the sectors of non-ferrous metals and oil &fats transmit the volatility to other commodity sectors nearly during the whole sample period.In addition,based on the net pairwise directional connectedness,we further discover that the sectors of non-ferrous metals and oil & fats are relatively independent of each other.