Asymmetric TVP-VAR connectedness between highly traded commodities and hedging strategies: Evidence from major contagions

Abstract

The objective of this study is to examine the return interconnectedness and asymmetric spillover effects in global commodity futures markets, with a focus on the impact of contagion. A competent asymmetric time-varying parameter vector autoregressive (TVP-VAR) model was employed for highly traded commodity futures (cocoa, coffee, corn, cotton, soy, sugar, wheat, and oil) between January 1, 2000, and March 31, 2024. This study investigates the connectedness of commodities in three dimensions: asymmetric spillovers, the influence of oil and oil substitutes on the network, and the impact of major contagions. The average total connectedness index (TCI) indicates that the connectedness is significant throughout the period and increases during the invasion. The findings imply that contagion effects trigger a potential alteration in the structure of the network integration level of the commodities, amplifying system-wide dynamic connectivity due to disurptions caused by oil and oil substitutes. The net plot depicts corn and soy as the net transmitters, with their magnitude increasing during the contagions. The pairwise connectedness index (PCI) revealed that corn-soy, corn‒wheat, and soy-wheat were the primary interactors, while oil became a significant interactor, particularly during the oil crash and the COVID-19 outbreak. Additionally, compared with other contagions, GFC had a potential asymmetric effect on the network. Positive returns dominate the interaction between the primary transmitter and receivers, whereas negative returns do not significantly dominate the total network. These investigations contribute to the literature on the food-fuel nexus in terms of asymmetries and the impact of contagions on the futures market. It also identified the optimal portfolio allocation based on the hedging effectiveness of three portfolio construction strategies.