The strong volatility spillover between crude oil and agricultural commodity markets reduces the diversification benefits and implies costly risk management process faced by portfolio managers and agricultural producers. This paper proposes a comprehensive study of their dynamic implied volatility spillover effects after the global financial crisis 2008–2009, while considering the transition between oil volatility's regimes. By using implied volatility, our analysis emphasizes on the forward-looking information that market traders usually convey in making decisions. We employ the generalized spillover indices within a fractionally integrated VAR model to capture the dynamic patterns of the volatility spillover effects alongside the Markov Switching Autoregressive model to extract the regimes of oil. Our results show new evidence that the net volatility spillover effect from crude oil to all agricultural commodities tends to decrease when crude oil remains in its low volatility regime. Conversely, this effect experiences an increasing trend when crude oil remains in its relatively high volatility regime. A dynamic strategy that combines oil and the most balanced agricultural commodity in terms of volatility transmission with oil (i.e., close-to-zero net volatility spillovers) depending on oil's regimes consistently outperforms the buy and hold strategy in terms of information ratio.
- Agricultural commodities
- Crude oil
- Dynamic volatility spillovers
- Fractionally integrated VAR
- Regime switching