Market Interdependence and Volatility Transmission Among Major Crops

Abstract

This paper provides a comprehensive analysis of the dynamics of volatility between the corn, wheat, and soybean markets in the United States. Volatility interactions across markets, if they exist, may lower the effectiveness of diversification strategies to mitigate price risks and should be taken into account when analyzing the pricing behavior of different agricultural commodities. We follow a Multivariate Generalized Autoregressive Conditional Heteroskedasticity (MGARCH) approach to evaluate the level of interdependence and volatility transmission across these major crops on a daily, weekly, and monthly basis. The period of analysis is 1998 through 2012. The estimation results indicate lack of cross-market dependence between corn, wheat, and soybean price returns at the mean level. We find, however, important volatility spillovers across commodities, particularly on a weekly and monthly basis. Wheat, and to a lesser extent corn, seems to play a major role in terms of volatility transmission. Additionally, we do not observe that agricultural markets have become more interdependent in recent years, despite the apparent higher financial market integration of agricultural commodities.

Keywords: United States, North America, Prices, volatility, agricultural products, Commodities, Markets, volatility transmission, agricultural commodities, Multivariate Generalized Autoregressive Conditional Heteroskedasticity (MGARCH)

JEL Classification: Q11, C32