Time-frequency analysis of the comovement between wheat and equity markets

Abstract

PurposeThis study aims to investigate the time-frequency comovement between wheat futures traded on three US markets (Chicago Board of Trade (CBOT), Kansas City Board of Trade (KCBOT) and Minneapolis Grain Exchange (MGE)) at different maturities and a global equity index.Design/methodology/approachAs they allow to trace transitional shifts over time and across different frequency bands, this paper relies on continuous wavelet tools to investigate the time-frequency comovement among wheat and global stock markets.FindingsThe results show an increase in wheat futures prices at all maturities and a weak integration level within each wheat market during the subprime crisis. Moreover, the wavelet power spectra maps show high wheat and equity price volatility at different time scales and for various subperiods. Furthermore, the continuous wavelet coherence highlights time-frequency-varying comovements between the markets considered, which become particularly high during times of crisis.Practical implicationsThe results provide market participants with a better understanding of the nature as well as the magnitude of the relationship between the global financial market and different wheat markets at different maturities and during tranquil and crisis periods. Indeed, from investors' perspective it is important to understand how markets are segmented or integrated during tranquil and crisis periods in order to better assess risks, diversify portfolios and implement more effective hedging strategies. As for regulators, a better understanding of the level of integration of different markets would further help refine macroprudential policies, and thus strengthen financial stability and resilience.Originality/valueThis paper enriches the existing literature by investigating the time-frequency comovement between wheat and a global equity market. Indeed, the dynamics between stock and wheat markets across different nearest to maturities have not been widely explored by previous studies.