Price Discovery And Volatility Spillover Of China’s Crude Oil Futures Market

In the mid-1980 s,the international crude oil pricing system achieved a historical shift from OPEC pricing to futures market dominant pricing,which is mainly dominated by two international crude oil futures markets,namely West Texas Intermediate(WTI)in the U.S.and Europe’s Brent crude oil futures(Brent).Although the dollar-denominated international crude oil futures markets can avoid the risk of crude oil price fluctuations for Chinese energy and chemical enterprises,it cannot mitigate currency risk.Meanwhile,China has the increasing urgent need of the price benchmark that can reflect the changes of crude oil supply and demand in domestic and Asia,with the hope of taking the opportunity to further increase the proportion of RMB settlement in international trade and promote the process of RMB internationalization.On this occasion,China’s crude oil futures(INE)market came into existence.The establishment of INE market marks a milestone in the opening of China’s futures market to the outside world,simultaneously fills the gap of regional pricing benchmark in Asia and improves the pricing system of global crude oil markets.In order to explore the international status of China’s crude oil futures market,this article comprehensively studies the information transmission process between China’s crude oil futures market and the international crude oil futures markets from the perspectives of the information content of a single market and the information flow across different markets.Price discovery research based on information content and volatility spillover research based on information flow will help to judge the international pricing position and the influence of China’s crude oil futures market,and will also play a vital role in investors’ asset allocation of portfolios and the policy makers’ market regulation.Taking the daily closing price of the main contracts of China’s and two international crude oil futures markets(WTI and Brent)as the research object,the article quantitatively studies the price discovery function of China’s crude oil futures market,and then determine the lead-lag relationship across crude oil futures prices by means of three different common factor methodologies—component share method,information share method,and modified information share method—under the framework of vector error correction model(VECM).Moreover,under the framework of the time-varying parameter structural vector autoregression with stochastic volatility(SV-TVP-VAR),the article constructs the dynamic spillover network based on the generalized forecast error variance decomposition(GFEVD)to measure the dynamics of volatility spillover of the crude oil futures system composed of the three markets,between a single market and the system and between the pairwise markets.The results reveal that:(1)China’s crude oil futures market is only a follower of the two international crude oil futures markets,not yet a promoter.Although China’s crude oil futures market has already displayed a certain price discovery function,it is still weaker than the two international crude oil futures markets;(2)The risk of crude oil futures system varies greatly over time.Brent futures market is a major net transmitter of systemic risk information,while China’s crude oil futures market and WTI futures market are the main net receivers.The acceptance status of the volatility from China’s crude oil futures market has a certain weakening trend,while that of WTI futures market has been continuously strengthened.As a whole,China’s crude oil futures market is the largest receiver of volatility spillover,which should further interact with the international crude oil system;(3)Major market events will increase the systemic risk of global crude oil futures and have some influence on the structure of the spillover network.However,the influence is mainly concentrated in the short term,while the long-term structure of volatility spillover network mainly depends on the level of the development of each market.The article reminds investors for risk hedging and asset allocation of crude oil portfolios to fully consider the lead-lag relationship and the structure of the volatility spillover network across home and abroad crude oil futures prices,especially the mutation risk of the structure of the volatility spillover network under the influence of major market events.Moreover,it is proposed that policy makers improve the trading rules of crude oil futures,enrich the varieties of crude oil traded derivatives,and accelerate the development of crude oil spot market,so as to ensure the stable development of China’s crude oil futures market.