Spillovers and portfolio optimization of agricultural commodity and global equity markets

Abstract

ABSTRACT We investigate the portfolio allocation and risk contribution characteristics of agricultural commodities, and the volatility spillovers between agricultural commodities and global and regional equity markets. We draw our results by applying a directional spillover index and a nonlinear portfolio optimization method. We find that the largest transmission and reception of spillovers occur among wheat, corn and soybeans, and between sugar cane and sugar beets. All global and regional stock market indices considered most largely spillover on cotton and cocoa. The global and Americas stock market indices are most largely spillovered by corn and soybeans. Also, while the European stock market index is most largely spillovered by cotton, the Asia Pacific stock market index is most largely spillovered by wheat and coffee. The portfolio optimization shows that sugar cane, followed by wheat and corn, are the largest risk contributors to total portfolio risk, whereas, cocoa, followed by lumber and cotton, are the lowest risk contributors to total portfolio risk. Cocoa and lumber are the most desirable for investment. Implications of the results are discussed.