Asymmetric Dependence Structure Between Climate Risk Volatility and Chinese Crude Oil Futures Commodity Price Using Copulas

Outlining the volatility of climate risk has become increasingly important in the financial sector. This study examines the correlation between climate change risk, economic policy, and Chinese crude oil futures. The dynamic copulas approach is used to assess both overall and tail dependence. A significant relationship exists between Chinese crude oil futures and climate uncertainty (CU) as well as climate policy uncertainty (CPU). Our study suggests that there are weak relationships with economic policy uncertainty that are clearly independent of climate conditions. The study highlights the significant pattern of right-tail dependence as opposed to left-tail dependence. It suggests that the pairs show minimal or no correlation when the index is low. The findings offer a new perspective on the links between Chinese crude oil futures, climate, and economic policy uncertainty. The empirical results show a strong time varying and asymmetric dependence between Chinese crude oil futures and climate related indices of uncertainty, particularly in the upper tail under high uncertainty conditions. On the contrary, there is a relatively low degree of dependence for economic policy uncertainty. These findings have significant implications for risk management, portfolio allocation and monitoring of climate-related financial risks in the emerging energy markets.