Quantile risk spillovers between energy and agricultural commodity markets: Evidence from pre and during COVID-19 outbreak

The spillover effect is a significant factor impacting the volatility of commodity prices. Unlike earlier studies, this research uses the rolling window-based Quantile VAR (QVAR) model to describe the conditional volatility spillover between energy, biofuel and agricultural commodity markets. Since the magnitude of connectedness and spillover effects may switch between bearish and bullish market states over time, a QVAR model is a relatively realistic and appropriate approach to capture the connectedness as compared to the mean-based approaches of Diebold and Yilmaz (DY; 2009, 2012, & 2014) which are mostly used in the literature. To this end, we employ volatility estimates by using the realized variance advanced by Parkinson (1980). Specifically, we investigate the time-varying volatility spillovers and connectedness among agricultural markets (wheat, corn, sugar, soyabean, coffee, and cotton), energy markets (gasoline, crude oil, natural gas) and biofuel (ethanol) markets from January 12, 2012 to May 10, 2021. By comparing our empirical analysis with results from the DY spillover model, we establish that connectedness is stronger in the left and right quantiles than those in the mean and median of the conditional distribution, emphasizing the importance of systematic risk spillovers during extreme market movements. Furthermore, results find that volatility spillovers and connectedness in the right tail is higher than in the left tail. In particular, we document significant volatility spillovers from agricultural markets to energy markets during extreme markets conditions and observe the dominance of agricultural markets over energy markets. To ascertain the impact of COVID-19 on the volatility of markets examined, we divide our sample into sub-samples and observe significant variation in the level of volatility spillovers and connectedness across the markets before and during the outbreak of COVID-19. Finally, some useful implications are summarized for investors' portfolios and risk avoidance.