Volatility linkages between energy and agricultural commodity prices

- We propose a model for volatility linkages between energy and agricultural commodities.
- The model captures the time varying covariance risk structure in a nonparametric way.
- Dynamics in mean and variances are estimated jointly.
- We provide dynamic hedging strategies.
- No evidence for biodiesel prices to affect the volatility of agricultural commodity prices is found.

We investigate price and volatility risk originating in linkages between energy and agricultural commodity prices in Germany and study their dynamics over time. We propose an econometric approach to quantify the volatility and correlation risk structure, which has a large impact for investment and hedging strategies of market participants as well as for policy makers. Volatilities and their short and long run linkages are analyzed using an asymmetric dynamic conditional correlation GARCH model as well as a multivariate multiplicative volatility model. Our approach provides a flexible and accurate fitting procedure for volatility and correlation risk. We find that in the long run prices move together and preserve an equilibrium, while correlations are mostly positive with persistent market shocks. Our results reveal that concerns about biodiesel being the cause of high and volatile agricultural commodity prices are rather unjustified.