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Volatility Spillovers in Agricultural Commodity Markets: An Application Involving Implied Volatilities from Options Markets

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  • Zhao, Jieyuan
  • Goodwin, Barry K.

Abstract

This article provides a new approach to analyze the issue of volatility spillovers. In particular, we investigate relationships and transmissions between implied volatilities in corn and soybean markets – two of the most important agricultural commodity markets in the United States. Using weekly average data from 2001 to 2010, we estimate a VAR model with Fourier seasonal components as exogenous variables. Results from this model indicate that volatility spillovers exist from the corn market to the soybean market, but there is no volatility spillover from the soybean market to the corn market. Impulse response functions from this model show that a standard positive shock in the implied volatility of corn has a positive impact on responses of the implied volatility of soybeans. However, responses of the implied volatility of corn to a shock in the soybean market are not significant. To examine the time invariance property of this model, we conduct three bootstrap versions of Chow tests (sample-split, break-point, and Chow forecast). All of these tests suggest significant structural break points in several time periods. To improve the accuracy of our model, we develop a threshold VAR model with four regimes that depend on previous levels of volatilities. Results from the threshold VAR model indicate that when both volatilities are relatively low, volatility spills over from the corn market to the soybean market, but when the implied volatility of soybeans is relatively high, volatility spillover effects reveal an opposite direction. Finally, using futures prices, we estimate a BEKK-GARCH model, which is commonly used to investigate volatility spillover effects. Results from the BEKK model show that volatility spillovers exist between the two markets, which is different from what we have found using implied volatilities.

Suggested Citation

  • Zhao, Jieyuan & Goodwin, Barry K., 2011. "Volatility Spillovers in Agricultural Commodity Markets: An Application Involving Implied Volatilities from Options Markets," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 103636, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea11:103636
    DOI: 10.22004/ag.econ.103636
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    Cited by:

    1. de Nicola, Francesca & De Pace, Pierangelo & Hernandez, Manuel A., 2014. "Co-movement of major commodity price returns: A time-series assessment:," IFPRI discussion papers 1354, International Food Policy Research Institute (IFPRI).
    2. Chang, Chia-Lin & McAleer, Michael & Wang, Yu-Ann, 2018. "Modelling volatility spillovers for bio-ethanol, sugarcane and corn spot and futures prices," Renewable and Sustainable Energy Reviews, Elsevier, vol. 81(P1), pages 1002-1018.
    3. López Cabrera, Brenda & Schulz, Franziska, 2016. "Volatility linkages between energy and agricultural commodity prices," Energy Economics, Elsevier, vol. 54(C), pages 190-203.
    4. Araujo-Enciso, Sergio Rene, 2012. "The relationship between trade and price volatility in the Mexican and US maize markets," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122544, European Association of Agricultural Economists.
    5. Ana I. Sanjuán-López & Philip J. Dawson, 2017. "Volatility Effects of Index Trading and Spillovers on US Agricultural Futures Markets: A Multivariate GARCH Approach," Journal of Agricultural Economics, Wiley Blackwell, vol. 68(3), pages 822-838, September.
    6. M. Thenmozhi & Shipra Maurya, 2020. "Crude Oil Volatility Transmission Across Food Commodity Markets: A Multivariate BEKK-GARCH Approach," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 20(2), pages 131-164, August.
    7. Tiwari, Aviral Kumar & Nasreen, Samia & Shahbaz, Muhammad & Hammoudeh, Shawkat, 2020. "Time-frequency causality and connectedness between international prices of energy, food, industry, agriculture and metals," Energy Economics, Elsevier, vol. 85(C).
    8. Manuel A. Hernandez & Shahidur Rashid & Solomon Lemma & Tadesse Kuma, 2017. "Market Institutions and Price Relationships: The Case of Coffee in the Ethiopian Commodity Exchange," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 99(3), pages 683-704.
    9. Haixia, Wu & Shiping, Li, 2013. "Volatility spillovers in China’s crude oil, corn and fuel ethanol markets," Energy Policy, Elsevier, vol. 62(C), pages 878-886.
    10. Ceballos, Francisco & Hernandez, Manuel A. & Minot, Nicholas & Robles, Miguel, 2017. "Grain Price and Volatility Transmission from International to Domestic Markets in Developing Countries," World Development, Elsevier, vol. 94(C), pages 305-320.
    11. Cornelis Gardebroek & Manuel A. Hernandez & Miguel Robles, 2016. "Market interdependence and volatility transmission among major crops," Agricultural Economics, International Association of Agricultural Economists, vol. 47(2), pages 141-155, March.
    12. repec:fpr:export:1344 is not listed on IDEAS
    13. Ayesha Sayed & Christo Auret, 2020. "Volatility transmission in the South African white maize futures market," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 10(1), pages 71-88, March.
    14. Chang, C-L. & McAleer, M.J. & Wang, Y-A., 2016. "Modelling Volatility Spillovers for Bio-ethanol, Sugarcane and Corn," Econometric Institute Research Papers EI2016-15, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    15. Ida Farida & Faurani Santi Singagerda, 2021. "Volatilitiy of World Food Commodity Prices and Renewable Fuel Standard Policy," International Journal of Energy Economics and Policy, Econjournals, vol. 11(1), pages 516-527.

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    Risk and Uncertainty;

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