The impact of WTI futures on Shanghai crude futures: identifying spillover effects on crude oil prices using the multiplicative error model

In March 2018, the Shanghai International Energy Exchange (INE) launched an RMB–denominated crude oil futures contract with medium crude oil with a high sulfur content, commonly traded by Asian operators, as the underlying asset. The main purpose of introducing INE crude was to establish a reference crude oil futures contract for Asian and other emerging markets, but it also aims to reinforce the Chinese currency and prevent volatility shocks from the regular oil futures. There has been a steady stream of research investigating the relationship of this new crude oil futures product with the benchmark West Texas Intermediate (WTI) and Brent futures. In this study, we explore the extent of volatility spillovers between WTI and INE crude oil futures. By applying Multiplicative Error Model econometric techniques, we identify and measure precisely the presence and direction of the spillover effect. A Markov–switching specification allows us to assess the time–varying nature of the spillover effect between high– and low–volatility regimes. Our findings show that as a regional energy future, INE is affected by WTI futures volatility spillover but not vice versa. Moreover, the Markov–switching version of the volatility model supports the assumption of time–varying effects that are dependent on high– and low–volatility regimes. A greater spillover effect is observed during the pandemic phase and vanishes in the post–COVID period. We also find that geopolitical and foreign exchange risks do not affect INE crude oil futures prices..