Assessing the asymmetric volatility linkages of energy and agricultural commodity futures during low and high volatility regimes |
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Authors: | Anthony N. Rezitis Panagiotis Andrikopoulos Theodoros Daglis |
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Affiliation: | 1. School of Applied Economics and Social Sciences, Agricultural University of Athens, Athens, Greece;2. Centre for Financial and Corporate Integrity, Coventry University, Coventry, UK |
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Abstract: | This study investigated the volatility linkages between energy and agricultural futures, including possible causes for these comovements, such as external macroeconomic and financial shocks during low and high volatility regimes. A combination of Markov-switching regressions and quadrivariate VAR–DCC–GARCH and VAR–BEKK–GARCH modeling revealed that external shocks have an asymmetric effect on the relationship of these assets with higher cross-correlations reported during high volatility regimes. This comovement effect outweighs the substitution effect between energy and agricultural products. Furthermore, the quadrivariate VAR–BEKK–GARCH model provides strong evidence of a bidirectional price volatility spillover between the agricultural and energy markets during periods of high volatility. Overall, the results suggest that energy futures can be effectively used for hedging in a portfolio comprising agricultural futures (and vice versa), while a combination of macroeconomic and financial index futures can serve as an effective hedging tool in investment portfolios comprising both energy and agricultural commodities. |
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Keywords: | agricultural futures energy futures hedging strategies Markov-switching regression volatility |
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