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On the effects of world stock market and oil price shocks on food prices: An empirical investigation based on TVP-VAR models with stochastic volatility

Ikram Jebabli (), Mohamed Arouri () and Frédéric Teulon

Energy Economics, 2014, vol. 45, issue C, 66-98

Abstract: Transmission of price shocks from one market to another one has long been investigated in the economic literature. However, studies have namely dealt with the relationship between financial and energy markets. With the recent changes in market conditions, investors, policy-makers and interest groups are giving special attention to food market. This paper aims at analyzing shock transmission between international food, energy and financial markets and to provide some insights into the volatility behavior during the past years and discuss its implications for portfolio management. To do this, we present a new time varying parameter VAR (TVP-VAR) model with stochastic volatility approach which provides extreme flexibility with a parsimonious specification. We resort also to a generalized vector autoregressive framework in which forecast-error variance decompositions are invariant to the variable ordering for the assessment of total and directional volatility spillovers. Our main findings suggest that volatility spillovers increase considerably during crisis and, namely after mid-2008, when stock markets become net transmitter of volatility shocks while crude oil becomes a net receiver. Shocks to crude oil or MSCI markets have immediate and short-term impacts on food markets which are emphasized during the financial crisis period. Moreover, we show that augmenting a diversified portfolio of food commodities with crude oil or stocks significantly increases its risk-adjusted performance.

Keywords: TVP-VAR model with stochastic volatility; Volatility spillovers; Portfolio diversification; Hedge effectiveness (search for similar items in EconPapers)
JEL-codes: C13 C15 G11 O13 Q18 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:45:y:2014:i:c:p:66-98

DOI: 10.1016/j.eneco.2014.06.008

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