Analysis of risk spillover effect of copper option in China

Abstract

Purpose

The purpose of this paper is to compare the changes in the risk spillover effects between the copper spot and futures markets before and after the issuance of copper options, analyze the risk spillover effects between the three markets after the issuance of the options and can provide effective suggestions for regulators and investors who hedge risks.

Design/methodology/approach

The MV-CAViaR model is an extended form of the vector autoregressive model (VAR) to the quantile model, and it is also a special form of the MVMQ-CAViaR model. Based on the VAR quantile model, this model has undergone continuous promotion of the Conditional Autoregressive Value-at-Risk Model (CAViaR) and the Multi-quantile Conditional Autoregressive Value-at-Risk Model (MQ-CAViaR), and finally got the current form of the model.

Findings

The issuance of options has led to certain changes in the risk spillover effect between the copper spot and its derivative markets, and the risk aggregation effect in the futures market has always been significant. Therefore, when supervising the copper product market and investors using copper derivatives to avoid market risks, they need to pay attention to the impact of futures on the spot market, the impact of options on the futures market and the risk spillover effects of spot and futures on the options market.

Practical implications

The empirical results of this paper can be used to hedge market risk investment strategies, and the changes in market relationships also provide an effective basis for the supervision of the copper product market by the supervisory authority.

Originality/value

It is the first literature research to discuss the risk and the impact of spillover effects of copper options on China copper market and its derivative markets. The MV-CAViaR model can capture the mutual risk influence between markets by modeling multiple markets simultaneously.

Citation

Ye, W., Wang, Y. and Zhao, J. (2022), "Analysis of risk spillover effect of copper option in China", Journal of Modelling in Management, Vol. 17 No. 4, pp. 1280-1291. https://doi.org/10.1108/JM2-03-2021-0053