On the effects of world stock market and oil price shocks on food prices: An empirical investigation based on TVPVAR models with stochastic volatility
AbstractTransmission 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.
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Bibliographic InfoPaper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-209.
Length: 59 pages
Date of creation: 10 Apr 2014
Date of revision:
Price volatility; TVP-VAR model; stochastic volatility; total volatility spillovers; directional volatility spillovers; food market; energy market; financial market; portfolios diversification; hedge effectiveness.;
This paper has been announced in the following NEP Reports:
- NEP-AGR-2014-04-18 (Agricultural Economics)
- NEP-ALL-2014-04-18 (All new papers)
- NEP-ENE-2014-04-18 (Energy Economics)
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