A Study On Risk Spillover Effect Of Copper Futures Between Lme And Shfe

Because of development of Chinese futures market, the correlation between Shanghai Futures Exchange's (SHFE) and London Metal Exchange (LME) becomes more and more strong. As a result, copper future market in SHFE has become the demand pricing center of the world copper market. At the same time, the global financial crisis leads market participants, such as academia, industry, and regulators, to pay more attention on risk fluctuation and gives opportunity to study risk spillover effect of copper futures between LME and SHFE.Basing on the mentioned background above and previous literatures, this paper uses EGARCH model to estimate the LME and SHFE copper futures' value at risk (VaR) with their price data from 2000 to 2009, and the whole period is divided into three sub-sample stages according to different economic conditions. The paper analyzes further correlation and risk spillover effects between LME and SHFE with VaR calculated. It shows that copper futures of LME and SHFE have strong risk-related correlation in short and long position. And the paper analyzes the risk spillover effects between LME and SHFE in the whole sample period and three sub-sample stages. Before the analysis of risk spillover effects, we use granger causality model to test risk spillover granger relationship between the copper futures markets of LME and SHFE by vector autoregression model (VAR) and vector error correction model (VEC). In this paper, we also use impulse response function to test the two copper future markets' risk spillover volatility in each sample stage.The results indicate that there exists significant two-way risk spillover granger causality between the two copper future markets in the whole period. But around the period of financial crisis, the two markets only have one-way risk spillover granger causality from LME to SHFE significantly. Impulse response analysis results show that VaR spillover is positive increasing and there are some short negative spillover effects which is never appeared in other sample stage. Furthermore, we know from these findings that Chinese exchange regime reform have no impacts on the risk spillover relationship between two copper future markets.The innovations in this paper include: Using the latest transaction data of two copper future markets of LME and SHFE from 2000 to 2009; During the whole decade, our study faces exchange regime reform and global financial crisis which former scholars have never encountered; Comparing with former studies on relationship between two copper future markets with price and return, we use VaR series of two copper future markets.Main framework of this paper is as follows: Chapter I is introduction. Chapter II mainly describes data selecting and processing. Chapter III uses GARCH model to estimate the copper future VaR in order to test risk relationship between two markets. Chapter IV is the empirical chapter to analyze risk spillover effects with Granger causality test and impulse response function. Chapter V summarizes the most contents briefly and points out several possible ongoing research directions.