The relationship between Chinese and FOB prices of rare earth elements – Evidence in the time and frequency domain

Abstract

This paper investigates the relationship between domestic and export prices of rare earth elements (REEs) taking into account both, the time and the frequency domain using Granger causality tests and cross wavelet analysis. We find areas of significant comovement between both, returns and volatility of domestic and export prices, with the degree of connection being low at higher frequencies, increasing over medium frequencies and lower frequencies. Moreover, the lead-lag effects between the Chinese and the export market are time-varying and heterogenous, with no particular market as the leader. The analysis of volatility transmission shows that own-market volatility rather than spillover from the Chinese to the export market or vice versa accounts for the biggest share of volatility. While volatility transmission shows substantial variation over time, the Chinese market is generally a net giver of volatility to the export market, especially at the medium frequency band. Accordingly, market participants buying REEs in the export market might want to track Chinese prices as leading indicators of price fluctutations due to spillovers.