Chinese Crude Oil Futures and Sectoral Stocks: Copula-Based Dependence Structure and Connectedness

Abstract

Abstract China launched its first crude oil futures on 18th March 2018, with the primary objective of introducing its own hedging instrument in China. Our study responds to this objective by investigating the dependence structure based on time-variant and time-invariant copula, connectedness in various market conditions, and hedging effectiveness of oil futures with eleven GICS sectors in China using daily returns data from 19th June 2019 to 24th February 2024. Findings suggest that time-varying copula is a best fit for all the GICS sectors in China except for the Energy. Similarly, the results of time-varying (TVP-VAR) connectedness indicate that the oil futures are the net receiver of shocks in total, short (1–5 days), and long-time (5 to infinity) spillover. The oil futures can better offset portfolio losses during the down market than normal and up markets. Lastly, based on TVP-VAR, the hedging ratio, optimum portfolio weights, and hedge effectiveness are calculated. We find a positive hedge ratio across various pairs of assets, which reduces the assets’ volatility. Moreover, hedge ratios and optimum portfolio weights are non-constant over time. Our results significantly contribute to the scant literature on Chinese crude oil futures and have implications for investors and policymakers.