Time-frequency analysis of geopolitical risk and food commodity market: a wavelet based investigation

Purpose. The most recent conflicts have demonstrated that geopolitical risk has evolved into a significant issue that has an impact on the global food markets. Through the use of bi-wavelet coherence analysis, the study aimed to establish the ways in which geopolitical risk and climate policy uncertainties influences the food commodity market using Geopolitical Risk Index (GPR index), Climate Policy Uncertainty Index (CPU index) and the five components that make up the FAO Food Price Index (FPI). Methodology / approach. The study used monthly data spanning from January 1990 to March 2024. Geopolitical risk was measured using the GPR index developed through textual analysis of news articles. CPU index, developed using similar textual analysis, is used to represent the uncertainties related to climate change risk. The FAO’s FPI constituents were used to represent global food commodity market. The research applied advanced econometric methods including Johansen cointegration tests, Toda-Yamamoto causality analysis, Brock-Dechert-Scheinkman (BDS) nonlinearity tests, and bi-wavelet coherence analysis. Wavelet coherence analysis was particularly focused due to its capability to capture dynamic, time-frequency relationships among non-stationary data series. Results. The study found two significant long-run cointegrating relationships among GPR, CPU and FPI constituents. Causality tests indicated that geopolitical risk significantly influenced climate policy uncertainty but not vice versa. Wavelet analysis revealed that GPR and vegetable oil has more strong co-movement, and it is also the same in the case of CPU. CPU has a leading influence on GPR, which means that policy uncertainties lead to increased geopolitical tensions. Uncertainties in climate policies have an effect on food commodity market in the short run. Whereas, GPR affects cereals during geopolitical tension periods. In the case of dairy products, time varying co-movements in the short run could be witnessed whereas in the long run medium co-movement could be seen. Volatilities occur in the prices of vegetable oils during periods of crisis which can exacerbate prices of other food commodities, which can lead to food security issues. Originality / scientific novelty. The originality of the study lies in the fact that the main focus is on GPR, CPU and five constituents of FAO’s FPI. Moreover, the study uniquely incorporates CPU index as a proxy to climate change risk and its impact on food commodity market. Most of the studies focus on the spillover effect of geopolitical risk on different classes of asset. Significant number of literatures focus on the spillover effect on oil market, stock market and commodities market. However, there are only limited studies that focus on food commodity market. In addition, analysing these factors provides a deeper understanding of how they affect food security and market dynamics. This innovative approach offers valuable insights to policymakers, investors and stakeholders of food commodity market. Practical value / implications. Creating a more economically sustainable environment is the goal of every country, which requires joint efforts by various sectors of the financial market, government officials and economic regulators. These findings are of great importance to policymakers and stakeholders in global food systems, highlighting the need to create adapted policy frameworks, focus on the vulnerability of individual commodities, and carefully implement climate policies to mitigate potential negative impacts on food security.