Extreme dependence between China’s oil market and the world oil market: empirical evidence and implications

Xiaoqian Wen and Yu Wei and Dengshi Huang

Journal of Energy Markets

Abstract: ABSTRACT In recent years, China's increasing dependence on oil imports has raised major concerns about energy security and risk management. This paper examines China's extreme dependence on the global market using time-varying copulas. Using the sample of Daqing (China), West Texas Intermediate (United States), Brent (North Sea), Dubai (Middle East) and Minas (Asia-Pacific) spot oil prices, we find that the dynamic conditional correlation (DCC) Student t copula can more properly describe the dependence between China's and the global oil market. It indicates that negative and positive extreme results between China's and the global oil markets are linked with the same intensity. Moreover, for the Daqing-Brent and Daqing-Dubai pairs, there have been significant increases in extreme dependencies in recent years. Among the three subperiods during 2007-11, their extreme dependencies rose more sharply in periods of global economic recession and global economic recovery than in times of global economic boom. For China's oil investors and energy policy makers, the empirical findings may have important implications for developing hedging strategies and energy pricing.

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