Dependence structure and risk spillover among nonferrous metal futures: a vine copula approach

ABSTRACT

Nonferrous metals play an indispensable role in industrial production and are of great significance for economic development, which makes it essential to understand the dependence structure and risk transmission among them. Given the fact that London Metal Exchange (LME) and Shanghai Futures Exchange (SHFE) are the most important metal futures markets in the world, this paper aims to analyse the feature and relationships between these two markets. We first identify the core assets of each market via the C-Vine copula approach and then examine the spillover effects among the dominant assets. Overall, three key findings emerged. Firstly, the core assets detected in both LME and SHFE are copper and zinc, and the central node in the C-Vine structure of each market rotates among these two. Second, the rotation of core assets traded on SHFE lags behind that of LME. Third, LME acts as the risk transmitter most of the time, and copper is recognized as the major risk source of the market. Our results have important implications for improving the efficiency of risk management, hedging strategy and asset allocation.

KEYWORDS:

• Nonferrous metal
• vine copula
• dependence structure
• risk spillover

JEL CLASSIFICATION:

• G15
• G32

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Actually, there is no overlapping problem in the node shifting. The overlaps in the figure are caused by the tracing point problem caused by the software. R Package called VineCopula (version 2.2.0) is used.

Additional information

Funding

This work is supported by the National Natural Science Foundation of China (Grant No. 72001090), Guangdong Basic and Applied Basic Research Foundation (No.2020A1515010846), Social Science Foundation of Guangzhou (No.2021GZZK06) and Institute of Finance of Jinan University Self Established Grants (No. 20JNZS06).