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Abstract

This paper investigates the development of volatilities in agricultural commodity prices during and after the food crisis with a focus on rapeseed future prices at the MATIF. We apply a dynamic conditional correlation model belonging to the class of multivariate GARCH models on price returns for rapeseed, crude oil and related agricultural commodity prices. Volatility developments on a daily basis between 1999 and 2009 are investigated with a focus on the period during the 2007/08 food crisis. An increasing correlation between the returns in rapeseed and crude oil price is found. Additionally, this correlation did not only increase during the food crisis but further rose afterwards. This implies that rapeseed prices react in an increasing manner to the same information as crude oil prices. Furthermore, rapeseed prices show high sensitivity to shocks and low persistency in volatilities and thus, bear the risk of overreactions in volatile phases. The increased correlation introduces the potential of even more pronounced volatilities in agricultural commodity prices during the next price boom since crude oil prices exhibited a higher volatility level versus agricultural commodity prices in the past. Furthermore, due to the difficulty in distinguishing commodity price trends, caused by changes in supply and demand, from volatilities, stemming from expectations and speculations, optimal production schemes are difficult to set up. Therefore they bear the risk of more pronounced price level changes in the long-run.

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