Empirical evidence of the volatility spillover between the food grain market and the Brazilian equity market

Purpose — This study analyses the relationship and volatility spillover between the food grain market and the Brazilian equity market. Methods — The analysis employed ARCH-class volatility models to test causality and contagion between food grain commodity price volatility and Brazilian stock market index volatility. Vector autoregressive models were also developed with Brazilian stock index volatility as the endogenous variable and the volatility of corn, wheat, and soybeans as exogenous variables.Implications — The grain market is important to the global economy and food security. Soybeans are the fourth most consumed and produced grain worldwide, after corn, wheat, and rice. Beyond food security and animal feed, soybeans and corn also support energy production. Given Brazil's significant food commodity production, this sector positively affects the Brazilian economy. As the stock market index is a leading economic indicator, a relevant link exists between the Brazilian equity market and the grain market studied here. Findings — The results reveal causality and cointegration between price returns in these markets. Cointegration is also confirmed between the volatilities of the selected variables, indicating a long-run relationship between Brazilian equity volatility and international food grain prices, along with contagion between returns and volatilities. The findings identify volatility contagion between the Brazilian equity market and three primary grain commodities: soybeans, corn, and wheat.Originality — This paper differs from previous studies by focusing specifically on the Brazilian equity market and three primary grain commodities (soybeans, corn, and wheat), using ARCH-class volatility models and vector autoregressive models to examine causality, cointegration, and contagion.