The extreme risk spillover effect of international commodity price fluctuations on China's real economy: Discussing the effect of geopolitical conflicts

Abstract

This paper investigates the extreme risk spillover effects from the international commodity market to China's real economy, with a particular focus on the impact of geopolitical conflicts. To this end, we utilize the Reuters CRB international commodity price index and China’s real economy industry price index from January 2019 to December 2024. A GARCH-Copula-CoVaR model is employed to quantify these extreme risk spillover effects. Furthermore, a sub-sample analysis is conducted to examine the evolution of spillover characteristics in the periods preceding and following major geopolitical conflicts. The findings suggest significant disparities and temporal variations in the extreme risk spillover effects of the international commodity market on various industries of China's real economy. On average, the energy and materials industries suffer the largest proportion of risk spillovers, as much as 59.9% and 56.4%, respectively. The Russia-Ukraine conflict triggers a substantial surge in extreme risk spillover effects across all industries of China's real economy, with the most affected industry experiencing an increase of 58.27%. However, the Israel-Palestine conflict does not result in an increased risk spillover effect for all industries. In quantifying extreme risk spillover, this study accounts for multiple characteristics of the return series and conducts a cross-sectoral analysis, thereby providing a critical foundation for precise macroeconomic policy formulation.