Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/145353
Authors: 
Chang, Chia-Lin
Liu, Chia-Ping
McAleer, Michael
Year of Publication: 
2016
Series/Report no.: 
Tinbergen Institute Discussion Paper 16-046/III
Abstract: 
The agricultural and energy industries are closely related, both biologically and financially. The paper discusses the relationship and the interactions on price and volatility, with special focus on the covolatility spillover effects for these two industries. The interaction and covolatility spillovers, or the delayed effect of a returns shock in one asset on the subsequent volatility or covolatility in another asset, between the energy and agricultural industries is the primary emphasis of the paper. Although there has already been significant research on biofuel and biofuel-related crops, much of the previous research has sought to find a relationship among commodity prices. Only a few published papers have been concerned with volatility spillovers. However, it must be emphasized that there have been numerous technical errors in the theoretical and empirical research, which needs to be corrected. The paper not only considers futures prices as a widely-used hedging instrument, but also takes an interesting new hedging instrument, ETF, into account. ETF is regarded as index futures when investors manage their portfolios, so it is possible to calculate an optimal dynamic hedging ratio. This is a very useful and interesting application for the estimation and testing of volatility spillovers. In the empirical analysis, multivariate conditional volatility diagonal BEKK models are estimated for comparing patterns of covolatility spillovers. The paper provides a new way of analyzing and describing the patterns of covolatility spillovers, which should be useful for the future empirical analysis of estimating and testing covolatility spillover effects.
Subjects: 
Energy and agriculture
covolatility spillovers
spot prices
futures prices
exchange traded funds
biofuels
optimal dynamic hedging
JEL: 
C32
C58
G13
Q14
Q42
Document Type: 
Working Paper

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