Biofuel, Grain and Vegetable Oil Markets: Dynamic Connectedness and the Optimal Portfolio

With the development of the biofuel market, its price risk becomes more prominent, and effective risk diversification has become increasingly critical. This study investigates the dynamic connectedness in global biofuels, China's grain and vegetable oil markets using a time‐varying parameter vector autoregression (TVP‐VAR). Moreover, based on this dynamic connectedness, we calculate dynamic hedge ratios and the optimal dynamic biofuel portfolio using the minimum variance portfolio, the minimum correlation portfolio, and the minimum connectedness portfolio. The results reveal three key findings: First, the increased total connectedness index (TCI) in global biofuels, China's grain and vegetable oil markets suggests that global biofuel expansion has heightened the vulnerability of China's grain and vegetable oil markets in the post‐pandemic era. Second, biofuels and soybean oil are net spillover transmitters, but corn, soybeans, palm oil, and rapeseed oil serve as net spillover receivers. Third, the cumulative returns, Sharpe ratio, and hedging effectiveness show that the minimum variance portfolio achieves the optimal portfolio through biofuel feedstock futures in the absence of biofuel futures contracts. These findings offer critical insights for energy transition strategy, biofuel expansion in developing and emerging economies, and risk management in the postbiofuel policy era.