The Study On Copper Futuers’ Risk Spillover Effect Between LME And SHFE-evidence From The Empricial Analysis Of Copula-CoVaR

With the deepening of globalization, the connection between the nationalfinancial system is becoming more and more closely. It becomes faster and moreserious that the risk spread to other countries from the crisis country, especially in thetime of financial crisis. As the world’s two largest metals futures, risk transferbetween LME and SHFE is also the world’watch in different time, researching therisk spillover effect between the two markets not only contains great theoreticalsignificance but also of great practical significance. Although there are manyacademic results for the reaserch of correlation between LME and SHFE market, mostof them are restricted to the qualitative level, rarely involves the degree of influence.This paper uses CoVaR, which measures the degree of risk spillover withspecific numbers,to quantatively analyse the risk spillover effect between the twomarkets. On the one hand, the CoVaR method overcomes the limitation of the lack ofquantitative research on the risk spillover effect. On the other hand, the CoVaRmethod makes up for the VaR method that cannot be used to measure correlationshipbetween markets.In the theory analysis part, firstly, this paper points out the advantage of CoVaRmethod by comparing the traditional risk measurement tool VaR method andemerging risk measurement tool CoVaR method. Secondly, this paper elaborates onhow to combine the GARCH model and Copula function to derive CoVaR.In the empirical analysis part, this paper selectes daily closing price data ofMCU3and SCFC3from January2006to December2012, divided in to three stageswith the financial crisis as the boundary point. The empirical is mainly divided intothree steps: firstly, selecting appropriate GARCH model to marginl distribution;secondly, selectting appropriate Copula function to calculate CoVaR; thirdly,calculating CoVaR from SHFE copper futures to LME copper futures and the oppsitefor every stage, comparing the characteristics of the risk spillover effect for everystage. In this paper, the specific chapters arrangement can be divided into theintroduction, literature review, model design, empirical research and conclusion inchapter five.The first part is Chapter I, which is an introduction section. This chapteremphatically expounds the research background and research purpose. It also putsforward the innovation of this paper as well as research methods.The second part is Chapter II, which is an literature review section. This chapter,divided into four parts, elaborates on the domestic and foreign research methods aboutrisk spillover effect.The third part is about Copula–CoVaR model design, which is also the keychapter of this paper. First we compare of VaR and CoVaR, then use Copula methodto deduce CoVaR.The fourth part is Chapter IV, which is empirical analysis section. this paperselectes daily closing price data of MCU3and SCFC3, combing the model inChapterIII, analyse the risk spillover effect of copper futuers quantitatively betweenLME and SHFE.Chapter V presents conclusions and policy recommendations.The innovation of this paper is mainly in the following two parts: The first part isto introduce the CoVaR into futures market. CoVaR is essentially VaR, but it is to usea numerical value to indicate a market’s risk when facing the risk of another market,which not only quantifies the risk spillover effext, but also makes up for VaR that canonly be used to measure a single market. Secondly, when calculating the CoVaR, thispaper uses GARCH-Copula model to estimate the CoVaR rather than traditionalquantile regression method, making the CoVaR more close to the actual market.This paper gets the following three conclusions: firstly, in terms of the direction ofthe risk spillover effect, copper futuers between LME and SHFE has the samedirection of the risk spillover effext, namely a rising market will lead to the rise inanother market, a droping market will lead to the drop in another market; secondly,the overflow strength during the financial crisis is more than that before and after thefinancial crisis; thirdly, from the view of global pricing power of copper, China hasbeen in a huge success in striving for global pricing power of copper. Before thefinancial crisis, LME firmly held the notion of global prices. After the financial crisis,SHFE began to increase its influence on LME.