Risk spillover between energy and agricultural commodity markets: A dependence-switching CoVaR-copula model

Unlike previous studies, we employ a relatively newer modelling technique - a time-varying copula with a switching dependence - to characterise the conditional dependence between energy and agricultural commodity markets in a more realistic way. Because the dependence may switch between positive and negative correlation regimes over time, a dependence-switching copula more appropriately and realistically captures a dependence structure than a single copula regime. Our findings indicate that the lower tail dependence is much stronger in a bearish regime than in a bullish regime, highlighting the importance of systematic risk spillovers during extreme downward movements. Furthermore, the significant risk spillovers from energy to agricultural commodities are verified by measuring the conditional value-at-risk (CoVaR) and delta CoVaR. Finally, some useful implications are summarized for investors' portfolios and risk avoidance.