Time-varying dependence structure between oil and agricultural commodity markets: A dependence-switching CoVaR copula approach

We examine the energy-food nexus using the dependence-switching copula model. Specifically, we look at the dependence for four distinct market states, such as, increasing oil-increasing commodity, declining oil-declining commodity, increasing oil-declining commodity, as well as declining oil-increasing commodity markets. Our results support the argument that the crash of oil markets and agricultural commodities happen at the same time, especially during crisis period. However, the same is not true during times of normal economic conditions, implying that investors cannot make excess profits in both agricultural and oil markets at once. Furthermore, our analysis suggests that the return chasing effect dominates for all commodities on maximum occasions. The CoVaR and.CoVaR results indicate important risk spillover from oil to agricultural markets, especially around the financial crisis.

Automated summary

The study found that during a crisis, the collapse of oil and agricultural markets often occurs simultaneously, but not in normal economic conditions. The return chasing effect dominates in most cases, and there is significant risk spillover from oil markets to agricultural markets, especially around financial crises.