Risk spillovers and diversification between oil and non-ferrous metals during bear and bull market states

This paper examines the dependence structure, risk spillovers and conditional diversification benefits (CDBs) between oil and six non-ferrous metals futures markets (aluminum, copper, lead, nickel, tin, and zinc), using a variety of copula functions and Conditional Value at Risk (CoVaR) measure. The results show significant lower tail dependence and upper tail independence between oil and non-ferrous metals markets. The lower temporal dependence is positive and heterogeneous between oil and non-ferrous markets and intensified during the onset of the global financial crisis (GFC) for copper, lead, and tin markets. The upside and downside spillovers from oil to non-ferrous markets and vice versa is significant and increased during times of GFC, oil price crash, and COVID-19 outbreak. The highest spillover effects are observed for the aluminum market, which is very vulnerable to oil price instabilities. Moreover, the spillover effects are asymmetric for all markets. Finally, we find that the CDB for aluminum and nickel are quite similar, and for lead, tin and zinc are also closed the same. The CDB is higher for nickel regardless of the portfolio composition and the probability level. The diversification gains decrease during stress market periods. Our findings have important implications in terms of funds allocation and portfolio design.