Risk Dependence and Risk Spillovers Effect from Crude Oil on the Chinese Stock Market and Gold Market: Implications on Portfolio Management

Abstract

We analyze crude oil’s dependence and the risk spillover effect on the Chinese stock market and the gold market. We compare both static and dynamic copula functions and calculate the average upward and downward spillover effect using the time-varying Copula model and the conditional value-at-risk approach. By utilizing daily data on crude oil prices, China’s stock market, and the gold market, we observe an asymmetric spillover effect: the downside spillover effects from crude oil prices on the Chinese stock market and gold market are larger than the upside spillover effect. We then identify changes in the structure of the sample periods and calculate the dynamic conditional correlation between them. In addition, we explore the optimal weight and hedge ratios in diversified portfolios to mitigate potential risks. Our results suggest that investors and portfolio managers should frequently adjust their portfolio strategies, particularly during extreme events like COVID-19, when financial assets become more volatile. Furthermore, crude oil can help reduce the risk in the Chinese stock market and gold market to some extent during different sub-periods.