The tail risk safe haven property of China's energy futures against US market implied volatility

Abstract

This paper analyses the tail risk contagion of US market implied volatility (USIV) on China's energy futures (CEF) markets, exploring how to utilize operations in the CEF to achieve a safe haven. Leveraging CEF characteristics to simultaneously take both long-/short-positions and engage in long-/short-run investment horizons, this paper defines eight different CEF safe haven attributes to counteract the tail risk of extreme increases in USIV. Using trading data from March 27, 2018, to October 30, 2023, the empirical results show that, first, in the analysis of the entire sample period, China's coking coal futures can serve as a weak safe haven, aiding long-position investors in mitigating the tail risks associated with US gold and stock market implied volatility. Coking coal futures also assist short-position investors in countering US stock market implied volatility tail risk. Second, in the sub-period analysis, the safe haven attributes of CEF exhibit strong heterogeneity and asymmetry across different periods. Finally, the time span during which CEF exhibits a particular safe haven attribute does not persist for an extended period.

Keywords

• China's energy futures
• Safe haven
• Implied volatility
• Multi-timescale analysis
• Cross-quantilogram model