A Study Of Extreme Risk Spillover Effects Between Shanghai Crude Oil Futures And The Chinese Stock Market

The launch of Shanghai crude oil futures marks China’s participation in the global battle for crude oil pricing power,which is conducive to further enhancing the influence of the RMB in the international monetary system.Crude oil futures prices are influenced by many economic,political and military factors,and with the global economic cycle on the downside,as well as extreme events such as the ChinaUS trade war and the Russia-Ukraine war,crude oil prices will become more volatile in the future and the Shanghai crude oil futures market will face a very difficult situation.The stock market and crude oil futures are important pillars of China’s financial system,and as capital mobility increases and financial markets become more integrated,the link between the two becomes closer.Therefore,in the current extreme situation,measuring the extreme risk spillover effects between Shanghai crude oil futures and China’s stock market is useful for understanding the linkages between the two,which is important for maintaining the stability of the financial system and preventing and resolving financial risks.In this paper,the daily log return series of Shanghai crude oil futures and the Shanghai Composite Index,the Shenzhen Stock Exchange Index and the Growth Enterprise Market Index of the Chinese stock market are selected as sample data for the empirical analysis of the extreme risk spillover effects between Shanghai crude oil futures and the Chinese stock market based on a GARCH-Copula-CoVaR model.Firstly,the skewed,spiky and thick-tailed distribution characteristics and the autocorrelation and heteroskedasticity of the sample data are treated by a GARCH-like model with skewed distribution.Second,a Copula function is fitted to the optimal GARCH model to characterize the correlation between the Shanghai crude oil futures market and the Chinese stock market.Finally,the upside and downside Va R,CoVaR,%CoVaR and ΔCoVaR values of Shanghai crude oil futures and Chinese stock market were calculated by the selected GARCH-Copula model and tested by Backtesting to verify the validity and accuracy of the Va R and CoVaR calculation models.The CoVa R method is used to quantify the extreme risk spillover effects between Shanghai crude oil futures and the Chinese stock market under two scenarios: extreme upward and extreme downward.The results of the empirical study show that: firstly,by building the GARCHCopula model,a weak and positive tail correlation exists between the Shanghai crude oil futures market and the Shanghai Stock Exchange Composite Index,the Shenzhen Stock Exchange Index and the Growth Enterprise Market Index;secondly,the calculated dynamic risk spillover value ΔCoVaR shows that there is a two-way extreme upward(downward)risk spillover effect between the Shanghai crude oil futures market and the Chinese stock market.Secondly,the calculated dynamic risk premiumΔCoVaR shows that there is a two-way extreme upside(downside)risk spillover effect between the Shanghai crude oil futures market and the Chinese stock market,with a clear time-varying feature and asymmetry in the level of the spillover.Third,the calculated risk spillover intensity %CoVaR shows that the extreme upside and downside risk spillover intensity between Shanghai Crude Oil Futures and the Shanghai Composite Index is greater than that between Shanghai Crude Oil Futures and the Shenzhen Stock Exchange Index and the Growth Enterprise Market Index.Fourth,the occurrence of extreme scenarios,such as the New Crown epidemic in early 2020 and the Russia-Ukraine war in early 2022,has sharply increased the level of extreme risk spillover from the Chinese stock market to the Shanghai crude oil futures market,suggesting that Shanghai crude oil futures are more vulnerable to equity market contagion under extreme circumstances.This suggests that Shanghai crude oil futures are more susceptible to equity market risk contagion under extreme conditions,especially to downside extreme risk spillovers from equity markets.The above empirical results are useful for the formulation of relevant market investment strategies and the prevention of extreme risk contagion.