Information Flows Between the US and China’s Agricultural Commodity Futures Markets—Based on VAR–BEKK–Skew-t Model

ABSTRACT

The information flow in the volatility and the skewness of returns are two factors closely influences the hedging risks for cross-border transactions. This article adopts a VAR–BEKK–MGARCH model with multivariate skew-t error terms to investigate the mean and volatility spillovers, while accounting for the potential skewness. The model is applied to real returns of corn, wheat, and soybeans futures in United States and China. The empirical results indicate the major role of United States in information transmission, and the increasing volatility spillovers of China to United States in highly marketized commodities and after trading structure changes. The analysis of skewness provides evidences for market inefficiency and implication on the investment decision and trading strategies.

KEY WORDS:

• agricultural commodity futures
• information flows
• multivariate skew-t distribution
• VAR–BEKK–MGARCH model
• volatility spillover

Notes

^1. The early version of the model was proposed by Baba, Engle, Kraft, and Kroner; this model employs a convenient parameterization for estimation and for analysis of simultaneous equation systems.

^2. Detailed results are not presented in the article due to limited space but can be requested from the authors.