Can agricultural and precious metal commodities diversify and hedge extreme downside and upside oil market risk? An extreme quantile approach

• Published in: Resources policy 2019-08, Vol.62, p.588-601
• Main Authors: Hernandez, Jose Areola, Shahzad, Syed Jawad Hussain, Uddin, Gazi Salah, Kang, Sang Hoon
• Format: Article
• Language: English
• Subjects: Agricultural commodities; Agriculture; Commodities; Corn; Cost analysis; Crude oil; Dependence; Diversification; Economic factors; Energy market oil prices; Extreme quantile dependence; Farmers; Gold; Interdependence; Investments; Markets; Noble metals; Petroleum; Precious metals; Predictability; Prices; Quantiles; Quantitative Finance; Rice; Silver; Spillover effect; Transportation; Variation; Wheat
• ISSN: 0301-4207; 1873-7641; 1873-7641
• DOI: 10.1016/j.resourpol.2018.11.007

The cost-effectiveness measures for production, processing, and transportation adopted by wheat, rice, and corn farmers, as well as the price fluctuations of gold and silver, doubtlessly depend on the downside and upside price trends of global economic factors such as the oil market. This dependence between oil and agricultural commodities motivates an analysis of interdependence and spillover influence in extreme oil market scenarios. By means of an extreme quantile approach, this study models the return distribution of oil in relation to some of the most traded agricultural and precious metal commodities. We find that extreme lower quantiles of oil returns have a positive effect on the lower quantiles of gold, silver, and rice returns. These effects are more significant using daily-frequency data, while for weekly and monthly frequencies, the effect is less significant. The decrease in oil returns during a bearish oil market will cause a decrease in precious metal and rice returns; therefore, these cannot be used to hedge the downside risk of oil investments, especially in the short term. These commodities might only serve as a diversification strategy for oil investments. The lower quantiles of oil returns have either no effect, or a negative effect, on the lower quantiles of wheat and corn, making them suitable hedges for extreme downturns in oil prices. •The interdependence and directional predictability among oil, precious metals, and agricultural commodities is modeled using the cross-quantilogram (CQ) approach.•Oil markets negatively and positively influence gold and silver price fluctuations under positive and negative extreme oil market scenarios.•Wheat and rice prices are positively, however mildly, affected only in extreme downside oil price scenarios.•Only corn is observed to diversify and hedge extreme downside oil market risk.