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Volatility Spillovers for Spot, Futures, and ETF Prices in Energy and Agriculture

Chia-Lin Chang (), Chia-Ping Liu and Michael McAleer
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Chia-Ping Liu: National Tsing Hua University, Taiwan

No 16-046/III, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: The agricultural and energy industries are closely related, both biologically and financially. The paper discusses the relationship and the interactions on price and volatility, with special focus on the covolatility spillover effects for these two industries. The interaction and covolatility spillovers, or the delayed effect of a returns shock in one asset on the subsequent volatility or covolatility in another asset, between the energy and agricultural industries is the primary emphasis of the paper. Although there has already been significant research on biofuel and biofuel-related crops, much of the previous research has sought to find a relationship among commodity prices. Only a few published papers have been concerned with volatility spillovers. However, it must be emphasized that there have been numerous technical errors in the theoretical and empirical research, which needs to be corrected. The paper not only considers futures prices as a widely-used hedging instrument, but also takes an interesting new hedging instrument, ETF, into account. ETF is regarded as index futures when investors manage their portfolios, so it is possible to calculate an optimal dynamic hedging ratio. This is a very useful and interesting application for the estimation and testing of volatility spillovers. In the empirical analysis, multivariate conditional volatility diagonal BEKK models are estimated for comparing patterns of covolatility spillovers. The paper provides a new way of analyzing and describing the patterns of covolatility spillovers, which should be useful for the future empirical analysis of estimating and testing covolatility spillover effects.

Keywords: Energy and agriculture; covolatility spillovers; spot prices; futures prices; exchange traded funds; biofuels; optimal dynamic hedging (search for similar items in EconPapers)
JEL-codes: C32 C58 G13 Q14 Q42 (search for similar items in EconPapers)
Date: 2016-06-27
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Working Paper: Volatility Spillovers for Spot, Futures, and ETF Prices in Energy and Agriculture (2016) Downloads
Working Paper: Volatility spillovers for spot, futures, and ETF prices in energy and agriculture (2016) Downloads
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