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Time-varying spillover effects and investment strategies between WTI crude oil, natural gas and Chinese stock markets related to belt and road initiative

Zhifeng Dai and Haoyang Zhu

Energy Economics, 2022, vol. 108, issue C

Abstract: This paper investigates the return volatility spillover effects and the dynamic relationships among WTI crude oil futures, Natural Gas futures, and the Chinese stock markets related to Belt and Road initiative employing the method of Diebold and Yilmaz (2012, 2014) based on TVP-VAR model and generalized forecast error variance decomposition. Our empirical results show that there exists a high interdependence among all analyzed assets, and the total volatility spillover has a sharp increase under the major crisis events. On average, WTI, GAS and the stock markets of FM, AGR and COM are the net receivers of systematic shocks, while the stock markets of EU, HSR and INF are the net transmitters of systematic shocks. Besides, we also calculate the hedge ratios, the optimal portfolio weights and the corresponding hedging effectiveness based on DCC-GARCH t-copula model. We find that WTI crude oil and Natural Gas futures are cheap hedging tools. When investing a small part in WTI crude oil future market and a large part in the analyzed stock markets, or investing a small part in the analyzed stock markets and a large part in Natural Gas future market, high hedging effectiveness could be achieved.

Keywords: Volatility spillover; Chinese stock markets; Belt and road; Hedge ratios; Portfolio weights; Hedging effectiveness (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.eneco.2022.105883

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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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