On the effects of world stock market and oil price shocks on food prices: An empirical investigation based on TVP-VAR models with stochastic volatility

Abstract

Transmission of price shocks from one market to another one has long been investigated in the economic literature. However, studies have namely dealt with the relationship between financial and energy markets. With the recent changes in market conditions, investors, policy-makers and interest groups are giving special attention to food market. This paper aims at analyzing shocks transmission between international food, energy and financial markets and to provide some insights into the volatility behavior during the past years and discuss its implications for portfolio management. To do this, we present a new Time Varying Parameter VAR model (TVP-VAR) with stochastic volatility approach which provides extreme flexibility with a parsimonious specification. We resort also to a generalized vector autoregressive framework in which forecast-error variance decompositions are invariant to the variable ordering for the assessment of total and directional volatility spillovers. Our main findings suggest that there is volatility spillover from crude oil and international stock markets to food markets. Shocks to crude oil or MSCI markets have immediate and short-term impacts on food markets which are emphasized during the financial crisis period. Moreover, we show that augmenting a diversified portfolio of food commodities with crude oil or stocks significantly increases its risk-adjusted performance.

The spillover effects across natural gas and oil markets: Based on the VEC–MGARCH framework

“…Phan et al [11] GARCH Energy and financial markets Daily Chen et al [12] SARMA Real estate markets Monthly Ding et al [13] Granger test Energy market Weekly Guesmi and Fattoum [14] DCC-GJR-GARCH Energy and financial markets Monthly Jebabli et al [15] TVP-VAR Energy and financial markets Monthly Karali and Ramirez [16] MGARCH Energy markets Monthly Lin et al [17] A bunch of GARCHs Energy and financial markets Weekly Narayan and Sharma [18] GARCH Energy and financial markets Daily Pesce [19] Panel TVP-VAR Macrofinancial Yearly Reboredo [20] MCARR Carbon and energy markets Weekly Truchis and Keddad [21] Co-integration and Copula Energy market and exchange rate Daily Zhang and Wang [22] Variance Decomposition Crude oil markets Daily Bashar et al [23] Structural VAR Energy and macroeconomy Monthly Ewing and Malik [24] Bivariate GARCH Commodity and energy markets Daily Liu and Chen [25] FIEC-HYGARCH Carbon and energy markets Daily Mensi et al [26] VAR-GARCH Commodity and stock markets daily Uddin et al [27] Wavelet Analysis Energy market and exchange rate Monthly/quarterly Wu and Li [28] BEKK-MGARCH Commodity markets Weekly Narayan and Narayan [29] GARCH Financial market Daily Narayan and Sharma [30] GARCH Energy and financial markets Daily Masih et al [31] Vector error correction Energy markets Monthly 2 But the static spillover table cannot test the statistical significance. 3 It must be noted that spot or future prices of Continental Europe and Japan with enough observations are not available.…”

“…Literatures such as Jebabli et al [15], Zhang and Wang [22] and Wu and Li [28] have provided evidence of changes in the relationship between oil and other commodity markets after the 2008 oil crisis. The possible influence of the 2008 oil crisis is also considered by re-examining the spillover effects using pre-2008 sub-sample.…”

An Overview of Global Wheat Market Fundamentals in an Era of Climate Concerns

“…Oil is another factor that affects agricultural commodity prices [35][36][37]. The oil market affects wheat prices both directly, through production inputs, and indirectly, through demand for biofuels and the resulting substitution effects.…”

U.S. Monetary Policy, Commodity Prices and the Financialization Hypothesis

“…They also show that commodity returns may favor speculation (Andreasson et al, 2016) but speculation might not, in turn, reinforce commodities portfolios' volatility (Miffre and Brooks, 2013). Yet, portfolio management is shaped by changes in markets' and assets' correlations, taking into account that energy prices may drive financial markets before the global crisis but instead support stock-market troubles after mid-2008 (Jebabli et al, 2014). In any case, the 2007-2008 global crisis is accompanied by troubles that also affect emerging-market countries, such as the Indian commodity markets (Shalini and Prasanna, 2016).…”