Return comovement and price volatility: a study of the US dairy commodity futures markets

Zaifeng Fan, Jeff Jump and Linda Yu

Applied Economics, 2025, vol. 57, issue 2, 232-250

Abstract: US dairy markets have become increasingly volatile, which presents a challenge for dairy farmers and industry participants to manage risk, disturbing the stability of the industry. However, the study of dairy volatility is limited. This article investigates the return comovement and price volatility of four major US dairy commodities: butter, cheese, Class III milk, and dry whey. We also investigate the COVID-19 pandemic’s impact on dairy volatility. Our results show that dairy commodities returns and volatilities are positively correlated, but only cheese and Class III milk correlate strongly. The volatilities of butter, cheese, and Class III milk are impacted comparably by return shocks and past volatility. However, dry whey volatility is predominantly driven by past volatility. Using multivariate generalized autoregressive conditional heteroskedasticity (MGARCH) models, we demonstrate that return comovements are time-varying and volatilities are interdependent among dairy commodities. Volatility spillover effects are observed among dairy commodities, especially between dry whey and cheese. The COVID-19 pandemic amplifies dairy volatilities and spillover effects, with a more substantial impact on cheese and milk. Interestingly, dry whey experiences the least impact and performs better during the pandemic. Our results aid market participants in risk management and inform policymakers’ decision-making processes.

Date: 2025
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DOI: 10.1080/00036846.2024.2303614

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