Dynamic Volatility Spillover Effect between Oil and Agricultural Products

Pick Schen Yip, Robert Brooks, Hung Xuan Do and Duc Khuong Nguyen

No 2019-009, Working Papers from Department of Research, Ipag Business School

Abstract: The strong volatility spillover between crude oil and agricultural commodity markets reduces the diversification benefits and implies costly risk management process faced by portfolio managers and agricultural producers. This paper proposes a comprehensive study of their dynamic implied volatility spillover effects after the global financial crisis 2008-2009, while considering the transition between crude oil volatility?s regimes. By using implied v olatility, our analysis emphasizes on the forward-looking information that market traders usually convey in making decisions. We employ a fractionally integrated VAR model to capture the long-memory behavior of the implied volatilities alongside the Markov Switching Autoregressive model to extract the regimes of crude oil. Our dynamic analysis shows new evidence that the net volatility spillover effect from crude oil to all agricultural commodities tends to decrease when crude oil remains in its low volatility regime. Conversely, this effect experiences an increasing trend when crude oil remains in its relatively high volatility regime. We also find that the agricultural commodity volatilities tend to interact with each other during the period of biofuel policy implementation.

Keywords: Dynamic volatility spillovers; regime switching; agricultural commodities; crude oil; Fractionally integrated VAR (search for similar items in EconPapers)
Pages: 31 pages
Date: 2019-01-01
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Journal Article: Dynamic volatility spillover effects between oil and agricultural products (2020)
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