Spillovers between Food and Energy Prices and Structural Breaks

Alanoud Al-Maadid,Guglielmo Maria Caporale,Fabio Spagnolo,Nicola Spagnolo

doi:10.2139/ssrn.2591400

Abstract

This paper estimates a bivariate VAR-GARCH (1,1) model to examine linkages between food and energy prices. The adopted framework is suitable to analyse both mean and volatility spillovers, and also allows for possible parameter shifts resulting from four recent events, namely: 1) the 2006 food crisis, 2) the Brent oil bubble, 3) the introduction of the Renewable Fuel Standard (RFS) policy, and 4) the 2008 global financial crisis. The empirical findings suggest that there are significant linkages between food and both oil and ethanol prices. Further, the four events considered had mixed effects, the 2006 food crisis and 2008 financial crisis leading to the most significant shifts in the (volatility) spillovers between the price series considered.

Highlights

The relationship between energy and food prices has been analysed extensively in the literature
The present study aims to fill this gap by examining the impact of well-known recent events on spillovers between food and energy prices in both the first and second moments in the context of a VARGARCH model with a BEKK representation
This paper has investigated the mean and volatility spillovers between energy and six selected food prices by estimating a VAR-GARCH model with a BEKK representation

Summary

Introduction

The relationship between energy and food prices has been analysed extensively in the literature. Zhang et al (2009), using weekly data, examined price volatility interactions between the US energy and food markets in the period 1989–2007 by estimating the BEKK model of Engle and Kroner (1995) Their results suggest that there is no relationship between fuel (ethanol, oil and gasoline) prices and agricultural commodity (corn and soybean) prices. Han et al (2015) used a multivariate normal mixture model and daily futures data from January 2000 to January 2014 to capture the structural properties of energy and three food commodities (corn, soybeans and wheat) They identified five breaks: (1) investment into commodity factors in 2004, (2) the food crisis (3), the RFS policy act of 2005, (4) the financial crisis, (5) the introduction of new European Union rules for bio-fuels in October 2012.

The econometric model

Empirical analysis

Hypotheses tested

Empirical results

Findings

Conclusions