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Risk spillover between energy and agricultural commodity markets: A dependence-switching CoVaR-copula model

Qiang Ji (), Elie Bouri (), David Roubaud () and Syed Jawad Hussain Shahzad ()

Energy Economics, 2018, vol. 75, issue C, 14-27

Abstract: Unlike previous studies, we employ a relatively newer modelling technique — a time-varying copula with a switching dependence — to characterise the conditional dependence between energy and agricultural commodity markets in a more realistic way. Because the dependence may switch between positive and negative correlation regimes over time, a dependence-switching copula more appropriately and realistically captures a dependence structure than a single copula regime. Our findings indicate that the lower tail dependence is much stronger in a bearish regime than in a bullish regime, highlighting the importance of systematic risk spillovers during extreme downward movements. Furthermore, the significant risk spillovers from energy to agricultural commodities are verified by measuring the conditional value-at-risk (CoVaR) and delta CoVaR. Finally, some useful implications are summarized for investors' portfolios and risk avoidance.

Keywords: Energy; Agricultural commodity; Dependence-switching copula; CoVaR (search for similar items in EconPapers)
JEL-codes: C58 C63 G11 Q02 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.eneco.2018.08.015

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