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Volatility linkages between energy and agricultural commodity prices

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  • López Cabrera, Brenda
  • Schulz, Franziska

Abstract

We investigate price and volatility risk originating in linkages between energy and agricultural commodity prices in Germany and study their dynamics over time. We propose an econometric approach to quantify the volatility and correlation risk structure, which has a large impact for investment and hedging strategies of market participants as well as for policy makers. Volatilities and their short and long run linkages are analyzed using an asymmetric dynamic conditional correlation GARCH model as well as a multivariate multiplicative volatility model. Our approach provides a flexible and accurate fitting procedure for volatility and correlation risk. We find that in the long run prices move together and preserve an equilibrium, while correlations are mostly positive with persistent market shocks. Our results reveal that concerns about biodiesel being the cause of high and volatile agricultural commodity prices are rather unjustified.

Suggested Citation

  • López Cabrera, Brenda & Schulz, Franziska, 2016. "Volatility linkages between energy and agricultural commodity prices," Energy Economics, Elsevier, vol. 54(C), pages 190-203.
  • Handle: RePEc:eee:eneeco:v:54:y:2016:i:c:p:190-203
    DOI: 10.1016/j.eneco.2015.11.018
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    More about this item

    Keywords

    Energy; Agriculture; Biodiesel; Volatility model; Interdependencies; Dynamic hedging;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q16 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - R&D; Agricultural Technology; Biofuels; Agricultural Extension Services

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