The impact of WTI futures on Shanghai crude futures: identifying spillover effects on crude oil prices using the multiplicative error model

Antonio Fabio Forgione, Carlo Migliardo, Edoardo Otranto and Luca Scaffidi Domianello

Journal of Economic Studies, 2025, vol. 52, issue 9, 215-233

Abstract: PurposeThis study quantifies volatility spillovers between WTI and INE, assessing their time-varying nature and INE’s sensitivity to external shocks. It evaluates INE’s integration with global markets and its role as a regional benchmark, offering insights into emerging energy markets’ resilience.Design/methodology/approachThis study examines the volatility spillover dynamics between WTI and Shanghai (INE) crude oil futures launched in 2018 to establish a regional benchmark and stabilize China’s currency. Using high-frequency data, a Multiplicative Error Model (MEM) quantifies spillovers, while a Markov-switching extension captures regime-dependent effects across the pre-pandemic, pandemic (2020–2021), and post-COVID phases. Robustness checks control for geopolitical risks (e.g. US–China tensions) and RMB exchange rate fluctuations.FindingsThe results show unidirectional spillovers from WTI to INE, with no reverse effect, highlighting WTI’s dominance. Spillovers intensify during high-volatility regimes, peaking during the pandemic but declining post-COVID. INE demonstrates resilience to geopolitical and currency risks, reflecting its regional focus. The Markov-switching framework confirms regime-dependent spillovers, indicating a structural market shift.Originality/valueThis study pioneers the use of MEM with Markov-switching to analyze WTI–INE spillovers, challenging static assumptions in prior research. It provides practical insights for Asian policymakers and investors, clarifying INE’s role as a regionally focused yet globally influenced contract. INE’s insulation from non-energy risks offers novel perspectives on the stability of emerging energy markets, informing risk management in poverty-dependent economies.

Keywords: Shanghai INE crude oil futures; Volatility spillover; Multiplicative error model; Markov-switching model; Time-varying effect (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-02-2025-0132

DOI: 10.1108/JES-02-2025-0132

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