Abstract
The upward movement in oil and food prices in the 2000s has attracted interest in the information transmission mechanism between the two markets. This paper investigates the volatility spillover between oil, food consumption item, and agricultural raw material price indexes for the period January 1980 to April 2008. The results of the Cheung-Ng procedure show that variation in oil prices does not Granger cause the variance in food and agricultural raw material prices. Since there is no volatility spillover from oil markets to food and agricultural raw material markets, investors can benefit from risk diversification. However, there is bi-directional spillover between agricultural raw material and food markets.
Highlights
The simultaneous upward trend in world food prices and oil prices in the 2000s has triggered an increased interest on information transmission dynamics between the two markets
As commodity markets are increasingly viewed as alternative investment areas, existence and direction of spillovers must be carefully evaluated by investors
Since there is no study that addresses the relationship between world consumption food items, agricultural raw materials, and oil prices, we consider studies on volatility spillover in various commodity markets
Summary
The simultaneous upward trend in world food prices and oil prices in the 2000s has triggered an increased interest on information transmission dynamics between the two markets. One can conjecture that the increased demand for bio-energy results in an increase in food prices and there might be a switch to the traditional fossil fuel alternatives. If this conjecture holds, one expects to see world food prices leading the oil prices. To the extent of our knowledge, there are no studies that examine the dynamic link between world oil and food consumption item prices. Applying a relatively new methodology that allows us to test causality both ways, we find that there is no volatility spillover from oil prices to food consumption item price index or to agricultural raw materials price index.
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