Does the Launch of Shanghai Crude Oil Futures Stabilize the Spot Market? A Financial Cycle Perspective

Abstract

Based on the examination of price discovery between Shanghai crude oil futures and spot market, this paper explores whether the introduction of Shanghai crude oil futures can play a stabilizing role in the spot market, alleviating the impact of the financial cycle risk on the crude oil market from March,2018 to December, 2019. The results show that there is only a uni-directional relationship of spot price to futures price, and spot plays a leading role in price discovery. The risk of financial cycle will increase the volatility of spot price, and the introduction of crude oil futures market can increase the impact of financial cycle on spot market. The additional research on the microcosmic mechanism of Shanghai crude oil futures indicates that crude oil futures market mainly influences the spot market fluctuation through the behaviour of traders: speculation increases price volatility in the spot market, which is more pronounced in the high volatility of financial cycle as oppose to hedging transaction.