Assessing the asymmetric volatility linkages of energy and agricultural commodity futures during low and high volatility regimes

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.