Correlation dynamics of crude oil with agricultural commodities: A comparison between energy and food crops

Debdatta Pal and Subrata K. Mitra

Economic Modelling, 2019, vol. 82, issue C, 453-466

Abstract: This study elucidates plausible correlation between crude oil and agricultural commodities. We assess whether the conditional correlation of crude oil with energy crops (e.g., corn and soybeans) is different from that of food crops (e.g., oats and wheat). We find a stronger correlation of about 20 percent between returns of crude oil and energy crops. However, the correlation coefficient value for oil-oats and oil-wheat is as low as eight percent. We add to the literature by exploring correlation in a dynamic context using three different GARCH models and found that conditional correlation between crude oil and energy corps is relatively high. In order to reduce risk associated with crude oil price fluctuations, this study also examined hedging possibilities against crude oil by investment in agricultural commodities. Although hedging effectiveness is low with all underlying agricultural commodities, soybeans provide relatively better hedging possibilities compared to other agricultural crops.

Keywords: Conditional correlation; Hedging; Crude oil; Agricultural commodities; Multivariate GARCH (search for similar items in EconPapers)
JEL-codes: C32 Q11 Q41 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:82:y:2019:i:c:p:453-466

DOI: 10.1016/j.econmod.2019.05.017

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