Do commodity futures have a steering effect on the spot stock market in China? New evidence from volatility forecasting

Fei Lu, Feng Ma, Elie Bouri and Yin Liao

International Review of Financial Analysis, 2024, vol. 94, issue C

Abstract: This study conducts a volatility forecasting analysis to examine whether Chinese commodity futures have a steering effect on China's spot stock market index. After constructing realized volatility indices for 36 commodity futures, a combination of forecasts and shrinkage methods are applied. The results reveal that the commodity futures volatility index has the power to predict the realized volatility of the stock market index. The PVC (Poly Vinyl Chloride) index, in particular, is a powerful predictor, which reflects its ability to serve as a guide for short-term market risk management and stock market investing decisions. The shrinkage model fully incorporates volatility information and consistently outperforms, even during the COVID-19 pandemic. We consider the impact of Chinese economic policy and investor sentiment and find that commodity futures maintain their outstanding predictive power. We also explore the difference in forecasting spot volatility by futures volume and show that predictive power depends not only on trading volume but also on commodity type. Further analysis highlights the predictive performance of commodity futures in semi-variance and stock sub-sectors, providing significant findings. Our study is statistically and economically significant and sheds light on stock market volatility forecasting and investment decisions in the largest emerging market.

Keywords: Commodity futures volatility; Stock market volatility; Emerging market; Economic policy uncertainty; Investor sentiment (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:94:y:2024:i:c:s1057521924001947

DOI: 10.1016/j.irfa.2024.103262

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