Dynamics of a Newly Established Agricultural Commodities Market: Financialization, Hedging and Portfolio Diversification in Turkey

Turker Acikgoz, Ozge Sezgin Alp () and Nazlan Belemir Alkan ()
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Turker Acikgoz: Department of Management, Baskent University, Ankara 06790, Turkey
Ozge Sezgin Alp: Department of Accounting and Finance, Baskent University, Ankara 06790, Turkey
Nazlan Belemir Alkan: Institute of Applied Mathematics, Middle East Technical University, Ankara 06800, Turkey

Annals of Financial Economics (AFE), 2023, vol. 18, issue 03, 1-33

Abstract: The purpose of this study is to investigate the dynamic relationship between financial assets and agricultural commodities market in Turkey. For this purpose, first, this study investigates financialization of agricultural commodities with a newly established agricultural commodities market of Turkey. Second, this paper analyzes hedging and portfolio diversification performances of agricultural commodities. By employing the DCC-GARCH approach of Engle (2002) and spillover index approach of Diebold and Yilmaz (2014), we analyze the financialization of agricultural commodities and calculate optimal hedge ratios and portfolio weights between two classes of assets. The results show the financialization of agricultural commodities at a very early age in Turkey. There exists a low degree of comovements and volatility spillovers between financial assets and agricultural commodities. Second, we show that agricultural commodities do not hedge financial investments sufficiently but they perform very well in terms of diversification and boost portfolio performances. Considering the previous limited literature on the topic, this study contributes to the literature by displaying the dynamics of a newly established agricultural commodities market in an emerging market. The findings of this study have many important implications for farmers and producers of agricultural commodities, and financial market actors such as individual investors, hedge funds and investment banks in terms of risk management and hedging.

Keywords: Agricultural commodities market; DCC-GARCH; volatility spillovers financialization; portfolio allocation (search for similar items in EconPapers)
JEL-codes: G10 G11 G13 G20 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1142/S2010495223500057

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