Temporal and spectral dependence between crude oil and agricultural commodities: A wavelet-based copula approach

This paper investigates the temporal and frequency domain connectedness between the price of crude oil and ten major agricultural commodities. We decompose returns into short-, medium- and long-run movements using the MODWT and investigate cross-commodities dependence structures in the decomposed returns using a DCC-Student-t copula. The method allows us to analyze variation in dependencies across time as well as frequencies of return movements. Structural variation is considered through subsample analysis. Consistent with previous research, we find that connectedness between oil and agricultural products increases post-2006 across all considered frequencies of return movements. However, the rate of increase is higher for longer investment horizons. The wavelet decomposition reveals that interconnectedness as a function of investment horizon is negative during the pre-2006, but positive during the post-2006 subsample. These findings support stronger connectedness primarily due to stronger connection between long-run return movements. Analysis of connectedness dynamics shows no strong pre- and post-2006 differences, suggesting that the recent higher connectedness is primarily a correlation level effect. We do find that persistence of connectedness variation is higher for long-run return movements. Overall, we document a more connected crude oil and agricultural commodities complex after 2006, with lower commodities diversification benefits in general, and higher correlation risk for longer investment horizons. (C) 2019 Elsevier B.V. All rights reserved.