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Volume 67, Issue 3

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Linkages Between Equity and Global Food Markets: New Evidence from Including Structural Changes

Alshogeathri, Mofleh; Jouini, Jamel Habib

Year: 2017   Volume: 67   Issue: 3   Pages: 166-198

Abstract: The study provides new and robust evidence to the relationship between stock and food markets in terms of shock and volatility spillovers and dependence structure by focusing on the importance of taking into account structural breaks. The results reveal that variance shifts are correctly detected, and that considering them affects volatility persistence, removes return spillovers, and gives rise to significant shock and volatility transmission. They also provide interesting evidence that stock and food markets are weakly dependent, particularly during the 2007-2009 financial crisis period, thereby showing that portfolio diversification benefits could be exploited between the two types of markets, especially over times of heavy financial market fluctuations. Additionally, the findings put forward a substitution mechanism across food classes, given the similarity of the weak correlations for all commodities regardless of the model specification. The study illustrates relevant implications in terms of optimal portfolio allocation and risk minimizing hedge ratio, and allows international investors and market participants to understand properly the shock and volatility transmission across markets and inter-market correlations in order to make sound decisions.

JEL classification: C32, G15, Q18

Keywords: stock and food prices, variance shifts, shock and volatility transmission, optimal weight, hedge ratio, time-varying correlation

RePEc: https://ideas.repec.org/a/fau/fauart/v67y2017i3p166-198.html

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