Systemic Risk in Chinese Commodity Futures Markets: A Graph Theory Analysis

Abstract

This paper sets out to explore the contagion of systemic risk in Chinese commodity futures market based on specific tools of the graph-theory. More precisely, we use minimum spanning trees as a way to identify the most probable path for the transmission of prices shocks. In the sample of 30 kinds of Chinese commodity futures, we construct the MST and obtain the most probable and the shortest path for the transmission of a prices shock. We find that metal futures play an important role in commodity futures market and copper stands at the heart of the system (The core position of the system is very important for the transmission of system risk). And our results also reveal that when the risk occurs, the MST structure becomes smaller, leading to the most effective transmission path of risk becomes shorter.