Coherence, Connectedness, Dynamic Linkages Among Oil and China's Sectoral Commodities with Portfolio Implications

doi:10.1007/s11424-021-0095-3

This paper investigates the time-frequency dependence, return and volatility connectedness, dynamic linkages, and portfolio diversification gains among oil and China's sectoral commodities, namely, Petrochemicals (CIFI), Grains (CRFI), Energy (ENFI), Non-ferrous metals (NFFI), Oil & Fats (OOFI), and Softs (SOFI), utilizing a proposed research framework that contains the wavelet coherence, novel TVP-VAR based connectedness, and the cDCC-, DECO-FIAPARCH (1, d, 1) model. The empirical results demonstrate that global oil market exhibits a relatively higher (lower) coherence with ENFI, NFFI, and OOFI (CRFI) on the long-term time horizon and the oil market leads China's sectoral commodities during most sample periods. The crude oil market transmits significant connectedness to China's sectoral commodities, especially the energy commodity sector (ENFI). The dynamic return and volatility total spillovers tend to intensify and exhibit significant fluctuations during the GFC and the oil price collapse. Further, the time-varying linkages among oil and China's sectoral commodities are positive and fluctuant, mainly at a relatively low level. The dynamic return and volatility connectedness, multi-view linkages, optimal portfolio weights, and hedging ratios display significant time-varying features. The oil-commodity nexus offers diversification benefits and the optimal-weighted portfolio presents the best variance and downside risk reduction performance. Furthermore, risk management effectiveness is market-condition-dependent and heterogeneous across different commodity sectors and sub-samples. This paper can not only help investors and market regulators to capture the complex interconnectedness and risk transmission trajectory among oil and China's sectoral commodities but also benefits for investors and portfolio managers to construct optimal portfolios and hedging strategies.

Key words: China's sectoral commodities, crude oil, portfolio diversifications, return and volatility spillovers, TVP-VAR connectedness

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