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Structure Dependence between Oil and Agricultural Commodities Returns: The Role of Geopolitical Risks

Aviral Tiwari (), Micheal Boachie (), Tahir Suleman () and Rangan Gupta ()
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Micheal Boachie: School of Economics, University of Cape Town, Rondebosch 7701, South Africa
Tahir Suleman: Department of Accounting and Finance, Otago Business School, OBS 345, PO Box 56, Dunedin, New Zealand

No 202079, Working Papers from University of Pretoria, Department of Economics

Abstract: The link between energy and agricultural markets have been studied extensively in the last two decades. Nonetheless, the literature fails to consider the effects of geopolitical risks (GPRs), geopolitical risks due to acts and GPRs due to threats in studying the link between the two markets. Addressing these issues, we examine the dependence between crude oil prices and agricultural commodities (oats, corn, wheat and soybean) for a period starting from April 4, 1990, to February 15, 2019. Our study used copula-based techniques to study the co-movement. We find that strong comovements between energy markets and agricultural markets, which are also negatively influenced by GPRs, and hence suggest the ability of agricultural commodities, particularly corn, oats and wheat, to act as hedge against oil returns downturn resulting from geopolitical unrest. This evidence of hedging is further vindicated, when we observe that agricultural and oil markets are negatively correlated when the former is bullish and the latter bearish.

Keywords: Oil; Agricultural Commodities; Copula Models; Geopolitical Risks (search for similar items in EconPapers)
JEL-codes: C22 Q02 Q10 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2020-08
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