Physica A 534 (2019) 122319

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Physica A
journal homepage: www.elsevier.com/locate/physa

Leverage effect and dynamics correlation between

international crude oil and China’s precious metals
∗
Yufeng Chen a,b,c , , Fang Qu a,c
a
School of Economics, Zhejiang Gongshang University, Hangzhou, 310018, China
b
College of Business Administration, Capital University of Economics and Business, Beijing, 100070, China
c
Center for Studies of Modern Business, Zhejiang Gongshang University, Hangzhou, 310018, China

article info a b s t r a c t

Article history: This paper examines the leverage effect and dynamic correlation between the interna-
Received 12 April 2019 tional crude oil and China’s precious metals (gold, silver, and platinum) over the period
Received in revised form 28 May 2019 2006 to 2018. The model links the univariate volatilities with the dynamic correlations
Available online 8 August 2019
via combining Copula method and DCC model, which provide us with a way to analyze
Keywords: the multivariate joint distribution correlation while exploring the marginal distribution.
Dynamic correlation The result indicates that the volatility of international crude oil and China’s precious
Precious metals metals has leverage effect. Specifically, gold and silver are more sensitive to good news,
Oil price and crude oil is opposite of them, indicating that information shocks may have diverse
Copula-DCC-GARCH asymmetric effects on the volatility of asset. Moreover, the dynamic correlation between
Structural breaks international crude oil and China’s precious metals is generally positive, and when the
financial and economic climate slowdown, there also be a negative correlation on them,
which is confirmed by the test of structural break.
© 2019 Elsevier B.V. All rights reserved.

1. Introduction

In fact, some commodities such as oil and precious metals have long been a hot asset for portfolio investors, just like
stocks and bonds. Based on this, many countries have actively promoted and established their own commodity trading
markets in order to stabilize commodity prices and maintain financial security. In recent years, however, the volatility
of commodity prices has drastically increased especially the crude oil and precious metals. This has led to extensive and
unremitting studies by scholars from various countries on the impact of volatility both in crude oil prices and precious
metals price on economy [1–6]. The reasons of this volatility are not only the impact of excess liquidity in the global capital,
macroeconomic shock in supply and demand and seasonal demand adjustment, but also the production of speculative
capital promotion after the financialization of commodities and the result of changes in spillover effect between markets
in the context of financial globalization. After the financialization, commodities such as oil and precious metals have
become an essential investment tool. The investment demand of financial capital has replaced the supply and demand of
the real economy as the mainly impact factor of price fluctuation [7,8]. Especially in the context of financial globalization,
the frequent trading of global financial capital has intensified commodity price volatility and even distorted the true
relationship between supply and demand. Consequently, it is crucial for China to understand the investment value after
financialization of commodities and to study the spillover effect and dynamic correlations between transnational markets
after financial globalization, which plays a vital role to maintain economic security and financial stability.

∗ Correspondence to: No.18, Xuezheng Street, Jianggan District, Hangzhou, Zhejiang, 310018, China.
E-mail address: chenyufeng@gmail.com (Y. Chen).

https://doi.org/10.1016/j.physa.2019.122319
0378-4371/© 2019 Elsevier B.V. All rights reserved.
2 Y. Chen and F. Qu / Physica A 534 (2019) 122319

China is the central consumer and importer of commodities such as crude oil and precious metals. In 2017, China’s total
crude oil importation ranked top in the world and the crude oil external dependence was 72.3%. According to the report
from International Energy Agency (IEA), the crude oil external dependence in China will steady at 80% in 2040. In addition,
China is also the largest gold producer in the world, accounting for 14% of global gold production in 2017, ranking top in
the world for 11 consecutive years. China is still the unique gold consumer in the world, with gold consumption accounting
for about 15% of the worlds in 2017. Consequently, the financialization and globalization on crude oil and China’s precious
metals is an irresistible trend. In April 2001, China announced the abolition of the nearly 50-year-old system of unified
procurement and allocation of gold. In October 2002, the Shanghai Gold Exchange (SGE) officially opened, which may
indicate the beginning of the financialization of precious metals in China. However, it was not until March 26, 2018 that
the crude oil futures in China were finally released on the Shanghai Futures Exchange (SFE). Prior to this, the China’s
precious metals have been mainly affected by international crude oil due to the lack of crude oil trading market in China.
It is well known that crude oil and precious metals are crucial strategic resources. In this sense, the volatility and the
dynamic correlation of crude oil and precious metals have become pivotal reference indicators for financial crisis and
even macroeconomic shock, and have caused economists and policymakers to pay great attention to it.
Consequently, this paper will study the volatility of the respective prices of international crude oil and China’s precious
metals from the perspective of empirical analysis, and explore their the spillover effects and dynamic correlation in
the context of financial globalization. The study may help the stakeholder to further excavate the understanding of
volatility and correlation after the financial globalization [9,10], and also have significant reference implication for market
investment, financial reform, and energy economic security.
Compared with the previous literature, the potential contributions of this paper are concentrated in the following
aspects: Firstly, this paper employ a combination method of Copula and DCC to study the leverage effect (asymmetric
effect of shock) of each series (oil, gold, silver and platinum) and from the perspective of the macro-economy to explore
the dynamic correlation between international crude oil and China’s precious metals (oil–gold, oil–silver, oil–platinum).
Thus, this combination method makes it possible to model the volatilities of each series (oil, gold, silver and platinum)
using univariate GARCH models with different standardized residual distribution, which provide a greater flexibility in
modeling and estimating the volatility and volatility spillover than while adopting the typical multivariate GARCH model.
Secondly, the method proposed by Bai and Perron [11,12] is employed to investigate the structural breaks of dynamic
correlation coefficient between international crude oil and China’s precious metals, rather than just using the time of
occurrence of an economic event to speculate the fluctuation of correlation on the period.
This paper is organized as follows. Section 2 provides the related literature and the comments. Section 3 describes the
methodology. In Section 4, the data source and filters are explained. Section 5 is about empirical results and discussions.
Finally, the conclusion in Section 6 has been shown.

2. Literature review

Crude oil and precious metals are special commodities in which commodity attributes and financial attributes coexist.
With the improvement of the financialization of commodities, financial attributes have become the foremost factors
affecting price and volatility [13]. Thus, most of past studies of them can essentially be divided into two categories. The
first category has been concerned with the volatility and information transmission between crude oil and precious metals.
For example, Watkins [14] studied the volatility of the price of major metals (including gold, silver, aluminum, copper,
lead, nickel, tin, zinc,) agricultural products (wheat) and two crude oil futures (WTI, Brent) between 1985 and 1994.
They found the volatility of oil prices does not appear to be separated far from the volatilities of other commodities, and
believed that the information transmission between commodities is relatively stable during this period. Baffes [13] is the
most representative of the study. He researches the effect of crude oil on 35 internationally traded primary commodities
prices and found evidence that crude oil has different information shocks to commodities and the precious metals reacted
strongly to crude oil price from 1960 to 2005. Hammoudeh and Yuan [15] employed the GARCH-type model to believe the
crude oil price as a determinant of the univariate volatility of three important metals (gold, silver and copper) in the US.
They account for interest rate changes and the results indicate that gold and silver have similar volatility feature globally.
Based on 40 years of data between 1968 and 2008, Shafiee and Topal [16] concluded that there is a fixed price-ratio
correlation between gold and oil, although this ratio will fluctuation over time, the information shocks between them has
not changed. Batten et al. [17] found that the volatility of precious metals is sensitive to macroeconomic shocks, but the
sensitivity is quite different. They believe that the fluctuation of the macroeconomic can explained the volatility of gold,
but it is not real to silver. Le and Chang [18] employ structural vector autoregressive (SVAR) approach to examine the
impact of volatility of crude oil prices on gold market returns. They found that oil price was positively related to gold
during the period 1994–2011. Moreover, Zhu et al. [19] believe that international crude oil prices played a vital role in
the volatility of China’s precious metals, both in the long run and the short run. Recently, research results based on the
autoregressive conditional jump intensity (ARJI) model have been shown that discrete jumps existed on the volatility of
crude oil market, and the effect of this jump on precious metals was significantly negative [20].
The second category of research goes a step further by studying the mean and volatility spillover effects and dynamic
correlations of precious metals, crude oil and other commodities. The significant spillover effect implies that the shock
increases the correlation of returns not just in the own market but also in other market. Sari et al. [21] employed the
 Y. Chen and F. Qu / Physica A 534 (2019) 122319 3

ARDL model to examine the co-movements and spillover effects among the precious metals (gold, silver, platinum and
palladium), the crude oil price and the spot price of the US dollar/euro exchange rate, and found evidence that the
correlations in them are weak in the long run and stronger in the short run. Charlot and Marimoutou [22] also studied
the volatility and dynamic correlation among exchange rates, stock indexes, crude oil prices and precious metal prices.
Different from traditional econometric methods, they chose the Hidden Markov Decision Tree (HMDT) model. Their results
shown that the correlation will increase in the bear market, while in other times the correlations are uncertain. It may
indicate that the correlation may be related to the economic shocks. Meanwhile, Kang et al. [23] employed the multivariate
DECO-GARCH model and constructed the spillover index to study the spillover effects among gold, silver, crude oil and
some agricultural commodities (wheat and rice), and concluded that the correlation will increase sharply during the
economic crisis. And the leverage effect caused by the asymmetry of information shock and risk is also the research
focus. Tiwari and Sahadudheen [6] discussed the dynamic correlation between crude oil price and gold price from 1990
to 2013. Their study employed the EGARCH model and found that the impact of crude oil price on gold price is asymmetric,
which means that positive and negative shocks of oil have different affects. Reboredo and Ugolini [24] reached a similar
conclusion, they employed the Copula function to explain the asymmetric response of metal prices to oil price, and found
the fact that spillover effect for upward oil price was larger than downward. In addition, according to recent research, the
impact of macroeconomic shocks (global financial crisis, European sovereign debt crisis) and structural breaks on volatility
is significant, which further implies that both volatility spillover effect and correlations persistently move together over
time [10,25,26].
To sum up, the second category of research goes further on the basis of the first category of research, which is not only
examining the volatility of a single series and the information transmission of them, but also considering the spillover
effects and correlation between crude oil and precious metals. In some studies, the crude oil and precious metals were
not discussed separately. Instead, they were considered as general commodities just as agricultural commodities, food,
raw materials and exchange rates [13,14,23], and that, they were found to have similar price trend and volatility, and did
not explain the crude oil and precious metals have special financial attributes in detail. Subsequently, many literatures
focus on the crude oil and gold, less on other precious metals commodities, and believed that oil and gold are both
important strategic materials and traded in US dollars, so there may be some correlation between them. Undoubtedly,
these literatures make little of the particularities of other precious metal commodities [17,21], such as silver and platinum,
and pay attention to the volatility of individual commodities [15,20]. With the improvement of modeling and estimation
methods, the dynamic correlation and spillover effect between crude oil and precious metals has gradually become the
hot topic of the discussion [21,22]. After that, some scholars maintain that the spillover effect may be asymmetric [6,24].
Nevertheless, the above literatures are mainly based on financial markets in developed countries, and there are relatively
few studies on the facts of China [19,20]. In summary, both the feature on volatility of crude oil and precious metals
themselves and the correlation between them should be given high attention.
Meanwhile, from the perspective of research methods, most of the previous studies used financial time series methods
(GARCH-type model, multivariate GARCH, SVAR, cointegration analysis and causality test) to explain the issues of volatility,
spillover effects and correlations on crude oil [27,28] and other financial markets such as precious metal. Certain studies
also employed other methods (Copula function, HMDT, spillover index and Quantile approach) to analyze such issues [29].
All of these research methods provide the powerful empirical support for subsequent research.

3. Methodology

The volatility with the univariate GARCH of the returns shows the unique function of the asset, especially the leverage
effect of volatility. When discussion the portfolio, it is necessary to consider the overall risk of the portfolio, which forces
us to consider the volatility, spillover and correlation, and this correlation needs to be explored in combination with the
volatility of individual asset returns. Many empirical researches have found that the correlation of financial time series
is often time-varying, it called dynamic correlation. Multivariate GARCH (MGARCH) is a powerful weapon for studying
the volatility and dynamic correlation, and its essence is modeling the conditional covariance matrix. The DCC model is
a typical MGARCH method that allows the correlation matrix to be dynamic over time while retaining few parameters.
Therefore, based on the DCC model proposed by Engle [30], combined with the Copula method, the volatility and dynamic
correlation between the international crude oil price and China’s precious metal are investigated. Finally, the Bai and
Perron test is used to further explore the impact of major economic events on the dynamic correlation.

3.1. The GJR-GARCH and DCC model

The purpose of this paper is to examine the leverage effect and dynamic correlation between international crude oil and
China’s precious metals through exploring current market trading activities. Firstly, the GJR-GARCH model is employed to
discuss the leverage effect of international crude oil, gold, silver, and platinum, which indicates the asymmetric effect of
asset price volatility and external information shocks. Secondly, this paper discussed the dynamic correlation between the
international crude oil and the China’s precious metals in combination with the Copula method and the DCC model, since
the Copula method can connect independent marginal distributions (regardless of correlation), which provide us with
a way to analyze the multivariate joint distribution correlation while studying the marginal distribution. This method
4 Y. Chen and F. Qu / Physica A 534 (2019) 122319

can not only study individual volatility feature, but also explore the dynamic correlation by combination the DCC model.
Therefore, this combination method provides more individual information than only use the DCC model.
To study individual volatility while get marginal distribution, the following GJR-GARCH(1,1) model is employed:

ri,t = 100 × ln Pi,t /Pi,t −1

( )
(1)
ri,t = µi + φi ri,t −1 + εi,t + ϕi εi,t −1 , i = 1, 2, . . . , k; t = 1, 2, . . . , T (2)
εi,t = hi,t ei,t , ei,t ∼ sstd (νi , λi )
√
(3)
hi,t = ωi + α ε 2
+ βi hi,t −1 + f γ ε 2
(εi,t −1 < 0)
( )
i i,t −1 i i,t −1 (4)
ei,t = εi,t / hi,t
√
(5)

Eq. (2) is the mean equation of the returns series with autoregressive moving average (ARMA) process. µ, φ and ϕ
denote the coefficients of the autoregressive (AR) and moving average (MA), respectively. Eqs. (3) and (5) show that
standardized residuals with a skewed student-t distribution (sstd/SK-t). And in this study, we will consider diverse
distributions for the residuals term ε (shock or innovation), including the normal, student-t and skewed student-t
distribution. The reason for selecting the skewed student-t distribution in Table 3 is given.
Eq. (4) is the variance equation, where f (•) is an indicator function, when εi,t −1 ⩽ 0, the f (•) = 1, else f (•) = 0.
For sustaining stationarity of the volatility process to be guaranteed, coefficients are assumed to satisfy the following
constraints, α > 0, β > 0, α + β + γ /2 < 1. γ represents a leverage effect or asymmetric effect, so when εi,t −1 > 0,
it means good news or positive shock, and εi,t −1 ⩽ 0 means bad news or negative shock. The effect of good news on
conditional variance is α , while the effect of bad news is α + γ . Therefore, when γ > 0, it can be considered as a leverage
effect and increase the volatility, when γ < 0, the market price is more sensitive to positive news and has a higher level
of response, when γ = 0, the model is reduced to a standard GARCH(1,1) model. Hence, Eqs. (2) to (5) constitutes the
GJR-GARCH(1,1) model. So far, the leverage effect and volatility of each series can be examined.
From Eqs. (2) to (5), the standardized residuals for each returns series can be calculated by GJR-GARCH(1,1) model.
Therefore, the standardized residuals can be added into the following DCC model:

Qt = qij,t , Q ∗ = diag qij,t

( ) ( )
(6)
∗ −1 ∗ −1
( ) ( )
Rt = Qt Qt Qt (7)

where
( ) ( )
qij,t = qij,t + a ei,t −1 ej,t −1 − qij,t + b qij,t −1 − qij,t
= (1 − a − b) qij,t + aei,t −1 ej,t −1 + bqij,t −1 (8)

In Eq. (8) the a and b are the coefficients of the DCC (1,1) model, satisfying a > 0, b > 0, a + b < 1, qij,t is the
unconditional covariance matrix of standardized residuals ei,t and ej,t . Therefore, Qt represents the covariance matrix of
the standardized residuals, the dimension (N × N ), the symmetric and positive definite. Finally, Rt represents the dynamic
correlation coefficients matrix.

3.2. The Copula-DCC-GARCH model

At present, the combination of Copula and GARCH-type model is widely employed in the analysis of financial time
series [31–36]. In this(paper, in order to) combine the Copula method with the GARCH model, the)standardized residuals
vector is assumed as e1,t , e2,t , . . . , eN ,t , and the joint distribution function of e1,t , e2,t , . . . , eN ,t is F , the joint density
(
function is f , the marginal distribution functions are F1 , F2 , . . . FN , and the marginal density functions are f1 , f2 . . . fN ,
respectively. Hence, there is a multi-dimension Copula function C so that the following equation can be showed:

F e1,t , e2,t , . . . , eN ,t = C F1 e1,t , F2 e2,t , . . . , FN eN ,t

( ) ( ( ) ( ) ( ))
(9)

Assuming that the density function of the Copula function C is c, then the partial derivative of Eq. (9) is available:
N
∏
f e1,t , e2,t , . . . , eN ,t = c F1 e1,t , F2 e2,t , . . . , FN eN ,t
( ) ( ( ) ( ) ( )) ( )
× fi ei,t (10)
i=1

There are about two types of Copula functions: static and time-varying Copulas. Static Copula function assumes that
the dependence structure between parameters is time-invariant, so the time-varying dependence structure between
international crude oil and China’s precious metals is employed by us, i.e., time-varying Copula function. However,
there are many specific forms of the Copula function [37], and this article uses Normal-Copula, t-Copula, Frank-Copula,
Gumbel-Copula and Clayton-Copula to estimate the dependence structure of international crude oil and China’s precious
metals.
 Y. Chen and F. Qu / Physica A 534 (2019) 122319 5

Table 1
GOF test results of various Copula function.
Gaussian Student-t Frank Gumbel Clayton
LL 7.287 13.01 8.685 5.789 3.042
WTI-AU
GOF 0.0282 0.0533∗∗∗ 0.0204 0.0624∗∗∗ 0.1217∗∗∗
LL 11.90 18.05 10.62 10.81 7.02
WTI-AG
GOF 0.0273 0.0591∗∗∗ 0.0272∗ 0.0665∗∗∗ 0.1315∗∗∗
LL 14.59 20.46 12.42 12.35 7.65
WTI-PT
GOF 0.0310∗ 0.0512∗∗∗ 0.0336∗ 0.0636∗∗∗ 0.1287∗∗∗

Notes: *, **, *** indicate statistical significance at the 10%, 5% and 1% level, respectively. LL denotes the LogLikelihood.

After estimating the Copula function, the Goodness-Of-Fit test (GOF) is required. The effective GOF test is based on
the comparison between empirical Copula and the hypothesized Copula [38], and this method is based on measuring the
squared euclidean distance between them. Hence, the smaller the GOF value, the better the model estimating effect where
√
GOF = N (CN − C ) (11)

The CN indicates the corresponding empirical Copula, C is the hypothesized Copula, N is the number of marginal
distribution functions. Table 1 shows the calculation results of GOF.
The t-Copula has the best estimating effect on the condition of significant coefficients, and this empirical result is
consistent with the studies of Kole et al. [39]. So, the t-Copula function is applied to explain new light on the dynamic
correlation between international crude oil and China’s precious metals. Thus, the standardized residuals vector joint
distribution function can be expressed as:

F e1,t , e2,t , . . . , eN ,t = CRt ,v F1 e1,t , F2 e2,t , . . . , FN eN ,t

( ) ( ( ) ( ) ( ))
(12)

where R denotes the correlation coefficient matrix of t-Copula, v is degree of freedom (DOF). To combine the t-Copula and
the DCC-GARCH model, the dynamic correlation coefficient matrix Rt of the DCC-GARCH model is employed to replace
the R matrix [36] in Eq. (12), as follows:

F e1,t , e2,t , . . . , eN ,t = CRt t ,v F1 e1,t , F2 e2,t , . . . , FN eN ,t

( ) ( ( ) ( ) ( ))
(13)

Finally, the Copula-DCC-GARCH model can be estimated by the following two-step methods are usually employed
[33,35]. Step 1: this paper use the univariate GJR-GARCH) model to estimate the volatility of each returns series to
obtain the standardized residuals vector e1,t , e2,t , . . . , eN ,t and maximum
(
( likelihood estimate of marginal distribution
parameters for them. Step 2: transform the standardized residuals vector e1,t , e2,t , . . . , eN ,t into the uniform distribution
)
vector of [0, 1] via a probability integral transform (PIT), and then estimate the dynamic correlation coefficient through
the log-likelihood function of the Copula-DCC-GARCH model. Hence, the log-likelihood function of this model is defined
as:
T
Γ (v+N/2) Γ (v+1/2) v+N ∑ τt ′ R−
t τt
1
( )
LLt −Copula (Rt , v; ut ) = −T log − NT log − log 1 +
Γ (v/2) Γ (v/2) 2 v
t =1
T T N
v + 1 ∑∑ τ2
∑ ( )
− log |Rt | + log 1 + it (14)
2 v
t =1 t =1 i=1

where ut = F1 τ1,t , F2 τ2,t , . . . , FN τN ,t , the vector τt is the vector of the (transformed

( ( ) ( ) ( ))
standardized
( )) residuals
which depends on the copula specification. For the t-Copula it maintains that: τt = tv−1 τ1,t , . . . , tv−1 τN ,t , tv−1 is the
( )
inverse student-t distribution with ν DOF. Rt denotes the dynamic correlation coefficient matrix of τit (in the DCC model
estimation, this paper replace eit in Eq. (8) to τit ). In general, two-step estimators provide computational tractability at
the expense of loss of efficiency.

3.3. Bai and Perron test

In order to reveal in detail the linkage between the international crude oil and China’s precious metals, this paper
uses the method proposed by Bai and Perron [11] to detect the structural breaks of dynamic correlation coefficient. The
purpose of Bai and Perron test is to estimate whether there has been structural change in the way two or more time
series are related over time. The specific method is as follows: Let yt be the dynamic correlation coefficient. Suppose yt
has m variable structural breakpoints, so there are m + 1 phases. The linear regression equation can be defined as:

yt = ci + ut , t = Ti−1 + 1, Ti−1 + 2, . . . , Ti (15)

6 Y. Chen and F. Qu / Physica A 534 (2019) 122319

Fig. 1. Daily spot price on WTI, AU, AG and PT from November 2006 to April 2018.

where, i = 1, 2, . . . , m + 1, ci is the mean of the dynamic correlation coefficient, and the value of variable structural
breakpoints (T1 , T2 , . . . , Tm ) is unknown. Let T0 = 1, Tm+1 = T , T denote the observed number of) dynamic correlation
coefficients, and the goal in this paper is to find the variable structural breakpoints T1∗ , T2∗ , . . . , Tm∗ so that:
(

T1∗ , T2∗ , . . . , Tm∗ = arg min RSST (T1 , T2 , . . . , Tm )

( )
(16)
T1 ,T2 ,...,Tm

Bai and Perron point out that M = 5 is sufficient in most economic empirical studies. Therefore, the number
of maximum variable structural breakpoints is set to 5 in this paper. If the maximum number of variable structural
breakpoints is equal to 5, it will adjust the maximum number of M. Finally, all possible variable structural breakpoints
can be detected. More details on this test can be found in [11,12].

4. Data description

In general, precious metals refer to gold, silver and platinum group metals. Consequently, the dataset consists of the
gold, silver and platinum commodities with the largest trading on the SGE, the market indices utilized are: AU(t + d)(AU),
AG(t + d)(AG) and Pt9995(PT). Moreover, the NYMEX crude oil price (WTI) is used to represent international crude oil.
Considering the availability of data while excluding data onto inconsistent transaction dates, the sample period was
extended from November 2006 to April 2018. After eliminating the mismatching transaction days, we finally obtain 2687
log-returns for each series. The starting date of our analysis is November 2006 in order to include possible distortions in
the linkage between crude oil price returns and commodity returns caused by the turbulence in financial markets occurred
in the context of the Global Financial Crisis (GFC) during the second half of 2007. All data series have been collected from
Wind Information Financial Database (Wind). Returns series were defined as Eq. (1), where Pi,t use the closing price for
each series.
Fig. 1 presents the tendency between WTI daily price and the AU, AG and PT daily price movements on the SGE. The
indexes of AU, AG, PT, and WTI refer to different ranges. This article employs the price of WTI as the standardized range
and converts the price index of AU, AG and PT into this range to explore their movement trends. From 2008 to 2009,
the change of WTI oil price was relatively large. After 2009, the change slowed, and the shocks followed. Until 2014, the
trend of it showed a downward trend. Both AG and PT had the same downward trend as WTI in 2008, but the downward
trend of AU was not significant. This may indicate that there may be a substitution effect between gold and crude oil in
financial markets.
Fig. 2 presents the volatility cluster of the returns series. The volatility of returns series is great fluctuation during
the GFC in 2008–2009 can be found, and the volatility cluster of returns to WTI is drastic, while AU, AG and PT are
relatively stable. Table 2 shows the descriptive statistical properties of the returns series (WTI, AU, AG and PT). During
the full sample period, the mean value of returns to AU, AG and WTI are positive, and AU had the highest value (0.0214%).
Moreover, the PT had the negative mean value (−0.0128%), may suggest that investment in platinum during this period
is not as good as other precious metals commodities. The widest gap between the maximum and minimum of the WTI
series shows that the international crude oil price fluctuation most acutely during this period, which is consistent with
the information shown in Fig. 2.
While all returns series were skewed and had high values of the kurtosis statistic, only the WTI returns have skewness
close to zero. Consequently, this fact may imply that there was a higher probability of a large decrease in returns with
 Y. Chen and F. Qu / Physica A 534 (2019) 122319 7

Fig. 2. Daily returns on WTI, AU, AG and PT from November 2006 to April 2018.

Table 2
Descriptive statistics of returns.
AU AG PT WTI
Mean 0.0214 0.0031 −0.0128 0.0055
Maximum 5.8503 8.2518 7.4097 16.4087
Minimum −9.4959 −12.9242 −16.0028 −19.6625
Std.Dev 1.0973 1.7202 1.4331 2.5286
Skewness −0.5754 −0.5730 −0.8065 −0.0803
Kurtosis 9.1632 9.8546 13.1235 8.6537
Jarque–Bera 4407.371∗∗∗ 5415.101∗∗∗ 11780.97∗∗∗ 3586.993∗∗∗
ADF −52.349∗∗∗ −50.716∗∗∗ −52.089∗∗∗ −55.770∗∗∗
PP −52.346∗∗∗ −50.766∗∗∗ −52.144∗∗∗ −55.852∗∗∗
Q(20) 44.5541∗∗∗ 30.4970∗ 52.3154∗∗∗ 59.2349∗∗∗
Q2 (20) 681.3796∗∗∗ 581.2981∗∗∗ 837.7184∗∗∗ 2365.5349∗∗∗
ARCH(20) 236.654∗∗∗ 266.316∗∗∗ 321.543∗∗∗ 625.271∗∗∗

Notes: The table displays summary statistics of daily returns over the period from November 2006 to
April 2018. ARCH is the Lagrange Multiplier test for autoregressive conditional heteroscedasticity. *, **,
*** indicate statistical significance at the 10%, 5% and 1% level, respectively.

the precious metals market, as suggested by the negative value of the AU, AG and PT skewness. Jarque–Bera tests statistic
is based on skewness and kurtosis, which further examines the non-normality of the returns series. The article examines
the stationarity of the returns series, since the mean value of each series very closing to zero, the Augmented Dickey–
Fuller (ADF) test is employed that does not include the constant term and the time trend term. The results of ADF tests
from Table 2 show that all series are stationary, and the Phillips and Perron (PP) test also proves this. The Ljung–Box
statistics Q(20) and Q2 (20) indicate that AU, PT and WTI exhibit significant serial autocorrelation. Finally, the Lagrange
Multiplier test statistics confirm the presence of significant ARCH effects in all returning series, thus supporting the use
of the GARCH-type model.

5. Empirical results

This paper first examines the leverage effect of each returns series (WTI, AU, AG and PT), and secondly employ the
Copula-DCC-GARCH model to explore the spillover and dynamic correlation of international crude oil to the China’s
precious metals. This is consistent with the interpretation of existing Copula-based multivariate GARCH models [33,35,36].
Finally, Bai and Perron test is used to analyze the structural breaks of dynamic correlation coefficients.
8 Y. Chen and F. Qu / Physica A 534 (2019) 122319

Table 3
Comparison between GARCH and GJR-GARCH model.
GARCH(1,1) GJR-GARCH(1,1)
norm std sstd norm std sstd
LL −3759.374 −3639.498 −3637.568 −3759.343 −3637.166 −3635.287
AU
AIC 2.8009 2.7124 2.7117 2.8016 2.7114 2.7108
LL −4927.752 −4601.055 −4601.055 −4925.262 −4596.130 −4596.129
AG
AIC 3.6709 3.4286 3.4294 3.6698 3.4257 3.4264
LL −4381.952 −4298.315 −4297.469 −4381.159 −4298.287 −4297.461
PT
AIC 3.2648 3.2037 3.2035 3.2635 3.2062 3.2027
LL −5810.557 −5757.308 −5752.343 −5789.255 −5747.278 −5741.797
WTI
AIC 4.3278 4.2889 4.2860 4.3127 4.2822 4.2789

Notes: LL denotes the LogLikelihood.

Table 4
Result of estimation of ARMA-GJR-GARCH model.
AU AG PT WTI
µ 0.0165 0.0121 −0.0144 0.0069
φ −0.0425∗∗∗ – 0.8498∗∗∗ −0.8061∗∗∗
ϕ – – −0.8758∗∗∗ 0.7670∗∗∗
ω 0.0064∗∗∗ 0.0485∗∗∗ 0.0177∗∗∗ 0.0206∗∗
α 0.0580∗∗∗ 0.1328∗∗∗ 0.0528∗∗∗ 0.0225∗∗
β 0.9495∗∗∗ 0.8957∗∗∗ 0.9343∗∗∗ 0.9437∗∗∗
γ −0.0231∗∗ −0.0589∗∗∗ 0.0066 0.0622∗∗∗
λ 0.9507∗∗∗ 1.0010∗∗∗ 0.9655∗∗∗ 0.9136∗∗∗
υ 5.1090∗∗∗ 3.0800∗∗∗ 6.0911∗∗∗ 8.1248∗∗∗
α + β + γ /2 0.996 0.999 0.990 0.997

Notes: *, **, *** indicate statistical significance at the 10%, 5% and 1% level, respectively.

5.1. Leverage effect of international crude oil and China’s precious metals

In view of the non-normal distribution features such as fat tail, kurtosis, autocorrelation, and asymmetry in financial
returns series. Consequently, the ARMA-GJR-GARCH model is employed to describe the returns series. By the Akaike
Information Criterion (AIC), the optimal lag order of the mean equation can be found. Most financial studies indicate that
the volatility in many financial markets is leveraged or asymmetric. The bad news of the same intensity is more volatile
than good news, and there is a negative correlation between volatility caused by information shocks and risk transfer
which is called leverage effect. It reflects an asymmetry effect come from instability of asset prices and information shocks
and also mirrors the risk aversion of investors.
This paper compared the estimating results of variance equation (GARCH(1,1) model and GJR-GARCH(1,1)) under
different distribution (Normal, Student-t and Skewed Student-t), and selected the optimal model to estimate the returns
series according to the LogLikelihood and AIC. The results in Table 3 show that for the AU, AG, PT and WTI, when the
standardized residual follow the Skewed Student-t distribution, the AIC of the model is smaller and the log likelihood of
the model is larger, so it can be found that the GJR-GARCH(1,1)-sstd model is the better of choice.
Table 4 reports the estimation results of the univariate ARMA-GJR-GARCH(1,1) model, coefficients (φ , ϕ ) of the mean
equation of the returns series are significant at the 1% level (As shown in Table 2, the AG has no autocorrelation, so its
mean equation contains only constant terms µ). The coefficients (ω, α , β ) of the variance equation are all significant
at both the 1% and 5% level, which indicate that all series has a significant GARCH effect. However, the leverage effect
coefficient γ between the various returns shows diverse feature. Firstly, the leverage effect coefficient of AU is negative,
which means that a bad news can only bring 0.0349 (α + γ in AU) times shock in short term. In other words, gold is more
sensitive to good news. For silver the leverage effect similar to gold can be found. Secondly, bad news for WTI will bring
a 0.0847 (α + γ in WTI) times shock, making the volatility increase, which means that the international crude oil is more
sensitive to bad news. Therefore, it is easy to find there is a potential hedging function between international crude oil
and China’s precious metals such as gold and silver. Finally, due to gold, silver and oil are widely used, but platinum is
mostly used for decoration, so the investment value of gold and silver is higher than platinum. Therefore, the asymmetric
effect (leverage effect) with platinum is not significant. In general, China’s precious metals can serve as hedge assets for
international crude oil during this period (2006–2018) because of the diverse leverage effect.
In this paper, the autocorrelation and heteroscedasticity tests are performed on the standardized residuals because
there are specific requirements for standardized residuals employing the Copula function. The Kolmogorov–Smirnov (K–
S) test is performed on the standardized residuals after the PIT. As shown in Table 5, the Ljung–Box Q statistics and
the Lagrange Multiplier test denote that the standardized residuals with 10 lags of the series are not significant, which
indicates that there is no serial autocorrelation and heteroscedasticity on standardized residuals. Consequently, the model
 Y. Chen and F. Qu / Physica A 534 (2019) 122319 9

Table 5
Test of standardized residuals on GJR-GARCH model.
AU AG PT WTI
Q(10) 13.3161 4.1929 5.8085 12.8271
ARCH(10) 12.733 4.104 5.505 12.632
K–S 0.9745 0.9893 0.9985 0.9824

Notes: This table presents the p-values of the Kolmogorov–Smirnov test. ARCH is the Lagrange Multiplier
test for autoregressive conditional heteroscedasticity.

Fig. 3. Dynamic correlation between the WTI and China’s precious metals on AU, AG and PT.

of GJR-GARCH is efficient and appropriate. Using the K–S test, it can be judged whether the standardized residuals after
the PIT follow the uniform distribution of [0, 1] so that the t-Copula function can be employed to explore the dependence
structure and dynamic correlation.

5.2. Dynamic correlation between international crude oil and China’s precious metals

China’s precious metal is affected by volatility in international crude oil, which is the reflection of the volatility spillover
effect of international crude oil. From the perspective of dynamic correlation, the impact of volatility spillover effects can
be intuitively understood. According to the Copula-DCC-GARCH model, dynamic correlations between the international
crude oil and China’s precious metals in this marked are presented in Fig. 3. There is generally a stable positive correlation
between them. It is because that the mean value of the correlation coefficients between international crude oil and China’s
precious metals (gold, silver, and platinum) is positive, and a similar conclusion can be drawn from Table 6. The reasons
for this positive correlation can be explained in terms of both commodity attributes and financial attributes of oil and
precious metals. Firstly, oil and precious metals are important industrial raw materials from the perspective of commodity
attributes, and in general they are complementary relationship, and one of the rising demands drives another demand
to rise, which leads to an increase in prices. Secondly, in the financial market, oil and precious metals are substitutes for
each other from the perspective of financial attributes and investment, when the price of oil rises, the returns rise, and
the precious metals as an investment alternative for oil, the expectation of rising precious metals returns will also be
raised, thus lead to precious metals investment growth. Their commodity attributes and financial attributes create this
positive correlation together.
However, these correlations show a negative feature in 2007 and 2009, and this negative correlation appeared more
frequently after 2011, especially in 2014 and 2016. Specifically, the correlation between WTI and AU to increase in 2007
and 2008, but it rapid to decline in the early of 2009, and eventually it was negatively correlated, while AU and AG also
10 Y. Chen and F. Qu / Physica A 534 (2019) 122319

Table 6
Descriptive statistics of dynamic correlation coefficients.
WTI-AU WTI-AG WTI-PT
Mean 0.0719 0.0957 0.1074
Maximum 0.3558 0.3645 0.3710
Minimum −0.2755 −0.1563 −0.1554

Table 7
Result of Bai and Perron test.
Date and correlation corresponding to the structural breakpoints
Date 2009-03–30 2011-06–14 2013-03–01 2015-08-03
WTI-AU
Correlation 0.1037 0.0954 0.0891 0.0333
Date 2009-06–01 2011-07–11 2013-04–03 2016-06-13
WTI-AG
Correlation 0.3645 0.0971 0.2381 −0.0099
Date 2009-06–01 2011-02–15 2013-05–29 2016-01-10
WTI-PT
Correlation 0.2716 −0.0981 0.0782 0.0828

Table 8
Mean value of dynamic correlation coefficients on each phase.
Phase I Phase II Phase III Phase IV Phase V
WTI-AU 0.0639 0.1237 0.0559 0.0753 0.0430
WTI-AG 0.0872 0.1586 0.0736 0.0902 0.0655
WTI-PT 0.1042 0.1640 0.1161 0.0731 0.0920

have the similar dynamic correlation. This negative correlation may be due to the sharp drop in international crude oil
that occurred between July 2008 and early 2009, forcing investors to switch investing in other commodities, which led to
the higher price of other commodities just like gold and silver. After May 2011, this negative correlation feature appeared
more frequently. Meanwhile, WTI oil price has re-entered the upward channel since early 2009, and fell sharply again in
August 2014. In fact, the negative correlation of international crude oil price after major economic events such as the GFC
over 2007–2009, and the European sovereign debt crisis in 2011, which indicate the hedging function between crude oil
and precious metals will emerge when the economic climate is uncertain.
Consequently, the macroeconomic shock is one of the vital reasons for the negative correlation is believed. And the
negative correlation can be seen as a sign that the precious metals financial attributes have increased, which may indicate
that precious metals may be more investment value during this period. It can be seen that the transform of positive and
negative in correlation is the reflection of the time-varying feature of the volatility spillover effects between international
crude oil and China’s precious metals.

5.3. Bai and Perron test on dynamic correlation coefficient

Here, this paper employs the Bai and Perron test [11,12] to explore how international crude oil and China’s precious
metals are affected by macroeconomic shocks. As shown in Table 7, there are four structural breakpoints in the dynamic
correlation coefficients between them (WTI-AU, WTI-AG, and WTI-PT).
Most of the time the structural breakpoints occurred is concentrated in the years of 2009, 2011, 2013 and 2016. This
is consistent with the times when the international crude oil has volatility.
From Table 8 and Fig. 4, the evidence that after the GFC, the confidence of the financial market has increased and the
dynamic correlation coefficient between them (WTI-AU, WTI-AG, and WTI-PT) has increased can be shown. Specifically,
the mean value of the correlation coefficient of WTI-AU increased from 0.0872 in phase I to 0.1586 in phase II. After
the European sovereign debt crisis in 2011, the mean value of the correlation coefficient fell again to 0.0736 in phase
III. And the crisis in 2013 eased, the mean value of the correlation coefficient rebounds to 0.0902 in phase IV. The mean
value of the correlation coefficients of WTI-AG, WTI-PT have the similar trends, which may indicates that the dynamic
correlation between international crude oil and China’s precious metals will fluctuation with the uncertain of economic
climate (macroeconomic shock), and when the economic situation is positive, the correlation will be stronger, and the
economic situation is bad, the correlation will be weak. It is may be that when the economic situation for better, the
hedging function between crude oil and precious metals may be weakened, which may be because both investment in
crude oil or precious metals can bring similar returns. Hence, when there is bad news such as negative political events
and economic deterioration, the hedging function of precious metals is extremely significant. In addition, it can be further
found from Table 7 that the structural breaks of the dynamic correlation coefficient between WTI and AU occurs before
WTI-AG and WTI-PT, indicating that international oil price will affect gold first, and further affect the correlation. This
means that within the precious metals market, gold price may be as guiding as wind vanes, while silver and platinum
may be subordinate.
 Y. Chen and F. Qu / Physica A 534 (2019) 122319 11

Fig. 4. Dynamic correlation coefficients with structural breaks.

6. Conclusion

The study employ the GJR-GARCH model to discuss the leverage effect of each returns series of international crude
oil, gold, silver and platinum, which indicates the asymmetry effect of volatility on asset price and external information
shocks. Secondly, based on the Copula-DCC-GARCH model, the dynamic correlation between international crude oil and
China’s precious metals are studied, and the reasons of fluctuation for this dynamic correlation are discussed. Finally, Bai
and Perron test is employed to explore the structural breaks of dynamic correlation coefficients. The study found that (1)
both the volatility of international crude oil and China’s precious metals have leverage effect (asymmetric effect), but their
feature of leverage effects is divergent. Gold and silver are more sensitive to good news, while the crude oil is sensitive
to bad news. (2) The positive dynamic correlation between international crude oil and China’s precious metals has been
found, and this positive correlation has not continued to increase. (3) There is also a negative correlation between crude
oil and China’s precious metals, and the occurrence of the negative correlations is closely related to the macroeconomic
shock, which has been proved from Bai and Perron test. That is to say, when the economic climate is improving, the
correlation will be stronger. Oppositely, the correlation will be weakened or even become negative. In other words, from
the perspective of financial markets, there is a substitution relationship between crude oil and China’s precious metals
only when the economy in a downturn. Within the precious metals market in China, gold price has a guiding function,
and other precious metals (silver, platinum) are subordinate.
These conclusions further excavate the understanding of financialization of commodities and financial globalization.
The crude oil and precious metals are vital strategic resources, so they may have special investment value and functions
such as leverage effect. And the fluctuation of correlations between crude oil and precious metals are still closely related
to the actual economic climate [8]. The correlation of international commodities markets (agricultural, metals and fossil
energy) are becoming more integrated due to financial globalization [40,41]. This has prompted a large amount of financial
capital to intervene in the commodity market, exacerbating the volatility between different categories of commodities,
which has led to special effects such as the leverage effect of crude oil and gold, and the price leadership of gold within
the precious metals market. In the volatility of commodity prices such as crude oil and gold, the China demand factor
cannot be ignored. In particular, it is worth noting that, in the context of the pricing of most commodities dominated by
overseas markets, although China is an important consumer of commodities such as crude oil and gold, but the loss of the
pricing power of the commodity is caused by the lack of some commodity trading markets and insufficient financialization.
Eventually, the international speculators will have a potential impact on the Chinese economy through domestic and
international market linkages. Only when China has established and perfected its own commodity markets (e.g. oil and
precious metals) can blunt this affect.
At present, the pace of financial reform and innovation in China is accelerating. More commodities are being released
into relevant financial markets such as crude oil futures that began trading in March, 2018 on Shanghai Futures Exchange,
12 Y. Chen and F. Qu / Physica A 534 (2019) 122319

which indicates the increasing financialization trend of China’s commodities. Exploring the leverage effect and dynamic
correlation between international crude oil and precious metals in China is beneficial to further explore the double-
edged sword features come from the China’s commodity financialization. On the one hard, it will vigorously promote
the development of futures, options and other commodity derivatives markets and help the pricing power competition,
achieving positive interaction between China’s demand factors and the volatility of commodity prices, avoiding the
potential adverse effects of financialization of commodity and financial globalization. On the other hand, it is necessary to
strengthen supervision to prevent excessive speculative funds from entering the commodity market and avoid excessive
financialization of commodities.

Acknowledgments

This work was supported by the National Natural Science Foundation of China (No. 71673250); Zhejiang Provincial
Natural Science Foundation of China Outstanding Youth Foundation (No. LR18G030001); MOE Major Project of Key
Research Institute of Humanities and Social Sciences in Universities, China (No. 14JJD770019); Zhejiang Provincial
Philosophy and Social Science Foundation, China (No. 18NDJC184YB). We would be grateful for any helpful comments
and any remaining errors are the joint responsibility of the authors.

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