Academic journal article Economics, Management and Financial Markets

Volatility in Agricultural Commodity and Oil Markets during Times of Crises

Academic journal article Economics, Management and Financial Markets

Volatility in Agricultural Commodity and Oil Markets during Times of Crises

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1.Introduction

Instability and high volatility have been characterizing commodity markets since the beginning of the third millennium. In particular, volatility in commodity markets in general has been very high since the Spring of 2008 (Nissanke, 2012), whereas the slowdown of the global economy with the 2008 Global Financial Crisis (GFC) has led to declining prices in the oil sector. In addition, fluctuations on currency markets combined with policies adopted by some exporting and importing countries as well as speculative practices have all contributed to generate uncertainty on commodity markets, and to enhance a general upward trend of prices (Andreosso-O'Callaghan and Zolin, 2010). This upward pressure on commodity prices can also be explained by other structural factors; an important such factor is the fast development of China and India since the 1990s, leading to higher demand for both food and energy products. Another factor is the use of feed crops for bio fuels - such as corn, soybeans, rapeseed and sunflower - which act as an alternative to traditional energy sources (IMF, 2008). These factors contributed to reverse the long-term path of declining price trends for several commodities.

The effects of these trends are well-known. The upward pressure on food and energy prices sparked waves of discontent and protests in several countries of the world shortly before the 2008 financial crisis and they brought to the fore the critical issues of food and energy security. The downward trend of oil prices has raised the question of the viability of many oil-extracting companies. Consequently, analyzing the way commodity markets react during times of economic and financial instability is an area of study that requires attention due to the enormous implications that fluctuating prices and volatility have on the world economy. The major goal of our study is to analyze a selected number of agricultural and energy commodity prices behavior during the GFC compared to their behavior during the Asian Financial Crisis (AFC). The ultimate objective is to shed light on whether these commodity prices were exhibiting different patterns during these two major episodes. In doing so, this study uses a two-step approach as follows:

1. The first step looks at volatility performance in the case of twelve selected agricultural commodity prices.

2. The second step consists in analyzing whether there is commodity codependence in relation to oil markets fluctuations.

The aim is to find out whether different dynamics were registered on agricultural commodity markets when appraising them on an individual basis, and what kind of dynamics were exhibited during the two crises episodes. This research also seeks to understand whether there are strong links between agricultural commodities and oil markets, with the goal of clarifying potential implications in terms of spillover effects. The focus on two major recent crises (AFC and GFC) helps to shed some light on price behavior when severe levels of uncertainty are impacting financial markets and on how that uncertainty might transfer towards the commodity sector. Bearing in mind the fact that speculative practices have contributed to enhance market instability in commodity markets, the study and analysis of crises and of volatility spillover effects in commodities is of paramount importance as commodity price volatility undermines economic growth and has a significant impact on the distribution of wealth for those countries that rely on the export of commodities for their subsistence.

This study is structured as follows: section 2 suggests an overview of global commodity markets; section 3 presents the data and methodology whereas section 4 delves into the results and analysis. Some conclusive avenues are suggested in a final section.

2. Commodity Markets in the Global Context

In a long term perspective, the 1973 oil shock combined with adverse weather conditions in 1972 led to a wave of increasing food and oil prices, the former lasting until the 1980s (Andreosso-O'Callaghan and Zolin, 2010). …

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