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Will commodity futures reduce systemic risk in the spot market? Evidence from Chinese commodity market

Will commodity futures reduce systemic risk in the spot market? Evidence from Chinese commodity... This paper aims to investigate whether the establishment of commodity futures can effectively hedge systemic risk in the spot network, given the context of financialization in the commodity futures market.Design/methodology/approachUtilizing industry association data from the Chinese commodity market, the authors identify systemically important commodities based on their importance in the production process using multiple graph analysis methods. Then the authors analyze the effect of listing futures on the systemic risk in the spot market with the staggered difference-in-differences (DID) method.FindingsThe findings suggest that futures contracts help reduce systemic risks in the underlying spot network. Systemic risk for a commodity will decrease by approximately 5.7% with the introduction of each corresponding futures contract, since the hedging function of futures reduces the timing behavior of firms in the spot market. Establishing futures contracts for upstream commodities lowers systemic risks for downstream commodities. Energy commodities, such as crude oil and coal, have higher systemic importance, with the energy sector dominating systemic importance, while some chemical commodities also have considerable systemic importance. Meanwhile, the shortest transmission path for risk propagation is composed of the energy industry, chemical industry, agriculture/metal industry and final products.Originality/valueThe paper provides the following policy insights: (1) The role of futures contracts is still positive, and future contracts should be established upstream and at more systemically important nodes in the spot production chain. (2) More attention should be paid to the chemical industry chain, as some chemical commodities are systemically important but do not have corresponding futures contracts. (3) The risk source of the commodity spot market network is the energy industry, and therefore, energy-related commodities should continue to be closely monitored. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png China Finance Review International Emerald Publishing

Will commodity futures reduce systemic risk in the spot market? Evidence from Chinese commodity market

Liu, Qing; Feng, Yun; Xu, Mengxia
China Finance Review International , Volume 14 (4): 22 – Nov 20, 2024
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References (61)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
2044-1398
DOI
10.1108/cfri-05-2023-0103
Publisher site
See Article on Publisher Site

Abstract

This paper aims to investigate whether the establishment of commodity futures can effectively hedge systemic risk in the spot network, given the context of financialization in the commodity futures market.Design/methodology/approachUtilizing industry association data from the Chinese commodity market, the authors identify systemically important commodities based on their importance in the production process using multiple graph analysis methods. Then the authors analyze the effect of listing futures on the systemic risk in the spot market with the staggered difference-in-differences (DID) method.FindingsThe findings suggest that futures contracts help reduce systemic risks in the underlying spot network. Systemic risk for a commodity will decrease by approximately 5.7% with the introduction of each corresponding futures contract, since the hedging function of futures reduces the timing behavior of firms in the spot market. Establishing futures contracts for upstream commodities lowers systemic risks for downstream commodities. Energy commodities, such as crude oil and coal, have higher systemic importance, with the energy sector dominating systemic importance, while some chemical commodities also have considerable systemic importance. Meanwhile, the shortest transmission path for risk propagation is composed of the energy industry, chemical industry, agriculture/metal industry and final products.Originality/valueThe paper provides the following policy insights: (1) The role of futures contracts is still positive, and future contracts should be established upstream and at more systemically important nodes in the spot production chain. (2) More attention should be paid to the chemical industry chain, as some chemical commodities are systemically important but do not have corresponding futures contracts. (3) The risk source of the commodity spot market network is the energy industry, and therefore, energy-related commodities should continue to be closely monitored.

Journal

China Finance Review International – Emerald Publishing

Published: Nov 20, 2024

Keywords: Commodity futures; Systemic risk; Spot market; Systemically important commodity

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