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This paper investigates whether agriculture commodities present as a good hedge against the recent crisis, including the Covid 19, Invasion of Russia in Ukraine and the banking turmoil following the interest rates hikes.
The crisis scenarios increase people’s attention to find the the safe-haven assets in order to protect their wealth. During the past, many research papers have put their attention on the precious metals and crude oil. In our paper, we will try to focus on the agriculture commodities which were paid much less attention. We will conduct our analysis on the futures contracts of commodities since the spot price follow the patterns of the futures contracts and the price is in reality virtual.
We conduct a first qualitative methodology the wavelet coherence analysis. This methodology helps to detect the transient correlations between signals of two non-stationary time series, in our case it will the correlation between our hedge target and different commodities. Under this methodolgy, I have found that among the 16 agricultural commodities, except for soybean and lean hogs, they all have shown hedging properties against at least one significant crisis during the period of 2020 to 2023. Furthermore, the GARCH X model completed the explanation for the hedging capability of agricultural commodities. Their volatility doesn’t change severely with crises, the results show that the crises have even brought a downwards effect on their volatility.
These findings may provide important suggestions on using the right agriculture commodities as a hedge under future crisis which will be similar to scenarios in the last 4 years.
