Price Volatility Transmission in China’s Hardwood Lumber Imports

Abstract

Hardwood lumber is the principal part of the global hardwood timber trade. China has become the largest importer of hardwood lumber in the world. However, China’s hardwood lumber imports are affected by price volatility. Thus, we investigated the price volatility transmission of China’s hardwood lumber imports. We aimed to detect the source, path, and intensity of the volatility transmission in China’s hardwood lumber imports, and reveal the intrinsic interactions between price volatilities. To date, there is little research on the price fluctuations of forest products. This paper provides an empirical analysis on the volatility transmission in China’s forest product imports. We selected four types of major hardwood lumber imports to China; that is, teak (Tectona grandis L.F.), merbau (Merbau), sapele (Entandrophragma), and casla (Terminalia spp.) (The Latin names of tree species are given in parentheses), and used their daily prices from 4 August 2010 to 15 April 2020. The Baba–Engle–Kraft–Kroner (BEKK) multivariate models and dynamic conditional correlation (DCC) models were employed. The empirical results indicate that there is an intrinsic relationship between the price fluctuations in China’s hardwood lumber imports. The volatility transmission chain originates from casla; it is transmitted along the casla→sapele→merbau→teak pathway. The direction of transmission is from lower prices to higher prices. The dynamic conditional correlation of each link in the chain does not exhibit any particular time trend. This suggests that volatility transmission is a crucial price mechanism in China’s hardwood lumber imports. Our findings have important policy implications for hedging timber price risks and designing timber trade policies.