Does Agricultural Commodity Price Co-move with Oil Price in the Time-Frequency Space? Evidence from the Republic of Korea
As the strategies and behaviors of oil and agricultural market participants change across frequencies and over time, this paper extends the literature on the associations between oil and agricultural commodity price fluctuations from the time domain to the time-frequency sphere with the continuous wavelet approach and quarterly data from the Republic of Korea. Our results reveal strong volatilities of oil price at high frequencies from early 1970s to late 2010s, and its interactions with farming product prices indeed vary in the time-frequency space. In particular, grain price strongly co-moves with oil price with in-phase patterns at high frequencies from 1970 to 1985 and at low frequencies from 1986 to 2000, respectively, and it leads oil price after 1985. Moreover, vegetable price exhibits high common power with oil price with in-phase patterns across frequencies from 1960 to 1995, it is led by oil price at low frequencies in our sample. Our analysis implies that considering the time-frequency dynamics of oil and farming product prices is important for market participants and investors to optimally diversify their portfolios and manage the associated risks.
Keywords: Crude oil; Agricultural commodity; GARCH model; Wavelet power spectrum; Squared wavelet coherence; Phase difference.
JEL Classifications: C63, E31, Q11, Q18, Q43.