Measuring the Regime-Dependent Spillover Between China’s Crude Oil Futures and International Crude Oil Futures with Portfolio Strategy Inference

This study employs a Markov-Switching VAR to analyze spillovers between Shanghai International Energy Exchange (INE) and West Texas Intermediate (WTI) crude oil futures. It identifies limited but regime-dependent spillovers with WTI predominantly as a spillover transmitter. We propose two regime-adjusted portfolios. Both achieve superior cost efficiency and higher risk-adjusted returns versus single-regime counterparts, with the long-only strategy dominating, especially in calm markets. The hedging between INE and WTI is asymmetric and regime-dependent. The risk of INE in long position can be efficiently hedged by Shorting WTI in low volatility regime while reverse hedging is more efficient when WTI‘s spillovers are elevated in high regime. Key implications include advocating regime-sensitive risk management for policymakers and investors.