The effect of global oil price shocks on China’s agricultural commodities

Chuanguo Zhang, Xuqin Qu

PII: S0140-9883(15)00221-2
DOI: doi: 10.1016/j.eneco.2015.07.012
Reference: ENEECO 3127

To appear in: Energy Economics

Received date: 20 December 2014

Revised date: 15 July 2015
Accepted date: 20 July 2015

Please cite this article as: Zhang, Chuanguo, Qu, Xuqin, The effect of global oil
price shocks on China’s agricultural commodities, Energy Economics (2015), doi:
10.1016/j.eneco.2015.07.012

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Title Page

The effect of global oil price shocks on China’s agricultural

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commodities

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Chuanguo Zhang, Xuqin Qu

School of Economics, Xiamen University, Xiamen 361005, P.R. China

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Corresponding author: Chuanguo Zhang

Address: School of Economics, Xiamen University, Xiamen 361005, P.R. China

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Phone: 86-592-13720898826; Fax: 86-592-2186366

Email: cgzhang@xmu.edu.cn.
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Co-author: Xuqin Qu
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Address: School of Economics, Xiamen University, Xiamen 361005, P.R. China

Phone: 86-592-18106989932

E-mail: 798307772@qq.com

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Abstract: This paper studied the effect of global oil price shocks on agricultural

commodities in China, including strong wheat, corn, soybean, bean pulp, cotton and

natural rubber. We regarded oil price volatility process as a combination of continuous

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process and jump process. We not only separated oil price shocks into positive and

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negative categories to identify different effects on agricultural commodities in

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continuous process, but also investigated how jump behavior influenced these

agricultural commodities. We found that the oil price was characterized by volatility

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clustering and jump behavior. At the same time, oil price shocks had different
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effects on agricultural commodities. In addition, the shocks on most agricultural

commodities were asymmetric. Only natural rubber was under the influence of the
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jump intensity of the oil price, in contrast to strong wheat, corn, soybean, bean pulp
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and cotton.

Keywords: Oil price shocks, Agricultural commodities, Effect

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1. Introduction

As the most important raw material and basic energy in the world, crude oil is of

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vital importance to socio-economic development and stability. China has been listed

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the second-largest oil-consumption country in the world, second only to the U.S. since

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2003 and afterwards has become the world's largest net oil-importing country since

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September 2013. External dependency on oil has improved in line with the growth of

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economy, mirroring the growing interdependence between China and the international

oil market. China’s oil consumption was 272.74 million tons in 2003 and reached
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507.40 million tons in 2013–an increase of 86.04%. Meanwhile, China's crude oil
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imports rose from 91.02 million tons in 2003 to 281.92 million tons in 2013,

increasing by 209.73%. Accordingly, China’s dependency on oil imports initially was

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33.37% in 2003. This figure rapidly climbed to 55.58% in 2013. Due to high external
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dependency on oil, global oil price fluctuations will affect relevant industries through

a variety of price transmission mechanisms and further bring risks and challenges for
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China’s economic development.

Trading is brisk on the global oil market; the oil price is not only affected by the

supply–demand relationship but also by other external market information. The global

oil price has displayed violent fluctuations under the impact of Iraq war and the

spreading subprime crisis during the 21st century. For example, the Brent crude oil

spot price was $46.53 per barrel on September 23, 2004. Then from September 2004

to July 2008, the global oil price has been rising. On July 3, 2008, it even rose as high

as $143.95 per barrel–up around 209.37%. However, shortly after the peak, due to
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disturbance of the exceptional information, the Brent crude oil spot price dropped

sharply to $33.73 per barrel on December 26, 2008–down about 76.57%. Henceforth,

it began to enter into a new motion cycle with relatively moderate volatilities. The

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Brent crude oil spot price mainly hovered at around $100 per barrel from February

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2011 to August 2014. Yet, soon after, there has appeared another drastic plunge in the

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global oil price since October 2014.

As a cornerstone of economic development, oil has penetrated into all aspects of

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society (He et al., 2012). Oil price shocks will not only affect the macroeconomy, but
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also will bring risks for industrial development. Some people blame the rise in the

oil price for the large increase in inflation. And as production input factors for most
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industries, the skyrocketing oil price will inevitably drive up the costs of production
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as well. For example, agricultural industry is gradually shifting from labor-intensive

industry to energy-intensive industry in China, the changes in agricultural production

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patterns lead to the changes in global oil prices having greater impacts on agriculture
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production costs, specifically on the agricultural machinery, pesticides and chemical

fertilizers and so on. According to the statistics from China’s Statistical Bureau, from

2002 to 2013, the price indices of chemical fertilizers and oils for farm machinery

rose more than 90%. In addition, the corn-based biofuel production also makes the

corn price be more vulnerable to fluctuations in the oil price. According to the study

of Ciaian and Kancs (2011), due to the expansion of biofuels from 2004 to 2008, the

interdependencies between the fuel and agricultural prices was expected to be stronger.

Vacha et al. (2013) also found that the connection between ethanol and corn was

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statistically significant. China is a large agricultural country and agriculture is

regarded as the foundation of the national economy. Once agricultural development is

at the mercy of oil price fluctuations, the whole national economy will be heading for

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serious trouble. Thus it is necessary to investigate how global oil price shocks affect

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China’s agricultural commodities.

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Currently, there exists a great deal of research investigating the spillover effect of

the crude oil price. Some scholars are concerned about how oil price shocks affect the

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macroeconomy. In their opinion, there existed a negative correlation between the oil
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price and macroeconomy (Baláž and Londarev, 2006; Hamilton, 2005). Meanwhile,

others launch a more detailed analysis about the effect of oil price fluctuations on
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industry, such as agricultural industry (Du et al., 2011), manufacturing industry

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(Jimenez-Rodriguez, 2008) and the stock market (Cunado and Perez De Gracia, 2014)

and so on. However, most research is mainly conducted from the perspective of
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developed countries. Only a few scholars focus on China at the industry level. For
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example, Wang and Zhang (2014) researched the influence of oil price fluctuations on

China’s fundamental industries. Up to now, there are few studies involving the impact

of oil price fluctuations on China's agricultural commodities.

This paper mainly discusses how oil price shocks impact China’s agricultural

commodities. On account of the availability of data, we choose six kinds of

agricultural commodities: strong wheat, corn, soybean, bean pulp, cotton and natural

rubber. We apply ARJI-GARCH model to investigate how oil price shocks, especially

the jump behavior of the oil price, affect China’s agricultural commodities. We divide

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oil price shocks into positive and negative categories to investigate the asymmetric

effects of oil price shocks on the six kinds of agricultural commodities.

This work is different from previous research in three aspects: Firstly, the paper

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analyzes China’s six kinds of specific agricultural commodities: strong wheat, corn,

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soybean, bean pulp, cotton and natural rubber, unlike previous studies focusing on

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macroeconomy or the whole fundamental industries. Secondly, we apply

ARJI-GARCH model, rather than traditional VAR model or the impulse response

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function to investigate how oil price shocks, especially the jump behavior of the oil
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price, affect China’s agricultural commodities. Finally, we investigate the asymmetric

effects of oil price shocks on the six kinds of agricultural commodities.

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2. Literature review
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Oil price fluctuations are closely linked with socio-economic activities.

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Accompanied by severe oil price fluctuations in recent years, the influence of oil price
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shocks is being paid more attention and has gradually become a popular topic for

study. The existing research mainly focuses on the effect of oil price shocks on

macroeconomy, energy industry and non-energy industry.

A great deal of research investigates the effect of oil price shocks on

macroeconomy. The macroeconomy responds differently to oil price shocks in

different countries, perhaps due to various economic organizational forms and

different development levels. In the U.S., nine out of ten recessions may have arisen

from the rise in oil prices since World War II (Hamilton, 2005). In Turkey, high oil

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prices had very harmful effects on economy. It could not only lead to the decline in

output and consumption but also arouse the deterioration of the net foreign asset

position (Aydın and Acar, 2011). In Thailand, Rafiq et al. (2009) pointed out that

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there existed unidirectional causality between oil price volatility and some

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macro-economic variables from 1993 to 2006 in terms of the Granger causality test.

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In China, according to Ou et al. (2012), China’s macroeconomy was less independent

on the WTI price shocks apart from China’s foreign trade and stock market in the

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light of the price transmission mechanism. In Nigeria, most macroeconomic variables
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were under weak influence of oil price shocks (Iwayemi and Fowowe, 2011). In

general, the effects of oil price shocks on the macroeconomy mainly involve three
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aspects. First, the potential effects of oil price fluctuations are on investment and
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output. An increase in the oil price would negatively affect the investment and output

in China (Tang et al., 2010). Second, oil price shocks can result in changes in
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unemployment rates. From 1947 to 1995, Uri (1996) suggested that there existed
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unidirectional causality from a change in the oil price to agricultural employment in

the United States. At last, oil price shocks keep in close touch with inflation.

Cavalcanti and Jalles (2013) found that oil price shocks accounted for a larger fraction

of inflation volatility in the United States.

As the connection between the international crude oil market and relevant

industries is becoming closer, some scholars have begun to focus on this topic from

the aspect of industry, and point out that oil price volatilities obviously have different

effects on different industries. According to Scholtens and Yurtsever (2012), how

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industries responded to oil price shocks depended on certain industries and the

mechanism by which oil price shocks impacted the industry.

Due to owning similar properties with crude oil, the relationship between energy

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commodities and crude oil has been paid more attention. Scholtens and Yurtsever

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(2012) found that mining, oil and gas industries were positively affected by oil price

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increases while negatively affected by falling oil prices. According to the study of

Ewing et al. (2002), the oil sector was impacted by the natural gas sector by direct and

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indirect volatility transfer effect, while the natural gas sector was directly affected by
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events in its own sector and indirectly under influence of the oil sector. Panagiotidis

and Rutledge (2007) suggested that there existed a cointegrating relationship between
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the gas and oil price in the UK during the sample period (1996-2003) in terms of a
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recursive methodology. However, in contrast to the above opinions, El-Sharif et al.

(2005) found that the relationship between oil prices and equity values in the non-oil
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and gas sectors was weak. Mohammadi (2009) also found that the long-term
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connections between electricity and crude oil and/or natural gas prices were

insignificant.

As for non-energy industries, the current work mainly concentrates on two

industries. One is the metals industry. Hammoudeh and Yuan (2008) found that oil

price volatilities negatively impacted gold and silver volatilities except copper

volatility. According to Narayan et al. (2010), the price in the gold market was at the

mercy of the price in the crude oil market and vice versa. Wang and Chueh (2013)

also showed that in the short term both gold and crude oil prices positively influenced

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each other. However, Soytas et al. (2009) found that global oil price had no impact on

precious metal prices in Turkey in the long run and vice versa, although there existed

transitory positive initial impacts of innovations in oil prices on gold and silver

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markets in the short run.

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The other is the agricultural industry. Some studies pointed out that there existed

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information transmission from the global oil price to several kinds of agricultural

commodity prices by using panel causality analysis (Farzanegan and Markwardt,

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2009; Nazlioglu and Soytas, 2012). Oil price shocks have different effects on
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agricultural commodity prices in different periods. Before the food crisis in

2006–2008, oil price shocks only accounted for a minor friction of variations in
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agricultural commodity prices. However after the crisis, oil price shocks contributed
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more on volatilities in agricultural commodity prices than aggregate demand shocks

(Wang et al., 2014). As for the mechanism by which oil price shocks influence the
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agricultural commodity prices, there are also two opinions. On the one hand, the oil
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price changes affected agricultural commodity prices by means of increasing the costs

of various energy-intensive inputs, such as chemical fertilizer, pesticide and

transportation costs. On the other hand, the ongoing growth of corn-based ethanol

production induced a higher derived demand for corn or soybeans which finally

resulted in higher prices of corn and soybeans (Chen et al., 2010). Based on nonlinear

causality analysis, Nazlioglu (2011) found that there was a persistent unidirectional

nonlinear causality from the price in the oil market to the price in the corn and

soybean markets. Mutuc et al. (2010) concluded that the global oil demand shocks

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originating from the improved economic activity played an important role in the

cotton market while oil supply shocks and precautionary oil demand shocks did not

contribute much to cotton price variation. However, there also existed different

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opinions on the question. For example, according to linear causality analysis,

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Nazlioglu and Soytas (2011) found that the oil price and agricultural commodity

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prices did not influence each other in Turkey, which supported the evidence on the

neutrality hypothesis.

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In terms of analytical methodologies, a number of literature adopted the
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Bayesian analysis (Du et al., 2011), the panel cointegration and causality analysis

(Farzanegan and Markwardt, 2009; Nazlioglu and Soytas, 2012), the detrended
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cross-correlation analysis (Liu, 2014), the VAR (Vector Autoregression) approach

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(Farzanegan and Markwardt, 2009; Jimenez-Rodriguez, 2008; Rafiq et al., 2009;

Wang et al., 2014), the Toda–Yamamoto causality approach and generalized

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impulse-response analysis (Nazlioglu and Soytas, 2011) and so on. In addition, it is

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popular to adopt a framework covering several models or methods in the literature.

Beckmann and Czudaj (2014) applied a GARCH-in-mean VAR model to study the

short term effects of oil volatility spillovers on the agricultural futures market. Haixia

and Shiping (2013) employed the univariate EGARCH model and the

BEKK-MVGARCH model to study the price volatility spillover effects among

China’s crude oil, fuel ethanol and corn markets. Cunado and Perez De Gracia (2014)

used VAR (Vector Autoregressive) and VECM (Vector Error Correction Model) to

investigate how oil price shocks impacted the stock returns in 12 oil importing

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European economies. In order to better describe the continuous volatility process and

the jump behavior of the oil price, Chan and Maheu (2002) adopted the jump model

along with a GARCH model to analyze the time series characteristics of daily stock

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returns during a 72 year period. In addition, Maheu and McCurdy (2004) presented a

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mixed GARCH–jump model to study the individual security returns. Lee et al. (2010)

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employed a Component-ARJI model with structural break analysis to investigate the

conditional variance and jump intensity of the oil price. To investigate the asymmetric

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effect of oil price shocks on stock returns and explore the importance of structure
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changes in this dependency relationship, Chiou and Lee (2009) implemented the ARJI

model with structure changes.

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In sum, a considerable body of literature mainly focuses on developed regions

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such as the EU and the United States, while only a few efforts have been made

concerning China. Meanwhile, most studies pay more attention to the macroeconomy
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and industry rather than specific commodities. For example, Ou et al. (2012)
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investigated how China’s macroeconomy responded to global oil price shocks. Zhang

and Chen (2014) focused on how global oil price shocks impacted China’s bulk

commodity markets and fundamental industries. With high external dependency on oil,

the relationship between China and the global oil market is becoming closer than

before. The global oil price fluctuations will exert an influence first of all on some

commodities then on relevant industries and finally on China’s economy.

As the foundation of China's national economy, the stable development of

agriculture is of great significance. Especially, after China entered WTO on December

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11, 2001, the agricultural commodity prices are not only affected by traditional factors

such as cost factors, but also impacted by external factors, especially the global oil

price fluctuations. There have been relatively violent fluctuations in China’s

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agricultural commodity prices for a long time. Therefore, it is necessary to analyze

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how global oil price shocks affect China’s agricultural commodities.

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3. Methodology

3.1 The ARMA model

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The autoregressive moving average (ARMA) model played an important role in

the process of analyzing the time series data (Pourahmadi, 1992). In general, we
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would employ the ARMA(p, q) model to estimate parameters and select a suitable
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model, where p is the dimension of the autoregressive component, and q is the

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dimension of the moving average component of the model (Ives et al., 2010). The

ARMA model of order (p, q) can be expressed as follows (Box and Jenkins, 1976):
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Eq (1) is the changes of Brent crude oil returns.

3.2 The ARJI-GARCH model

A number of literature has shown that the GARCH model is appropriate for

analyzing the conditional variance, therefore we combine the jump model with a

GARCH model (Chan and Maheu, 2002). Define the history of returns as the

information set at time t (Chan and Maheu, 2002), . The

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ARJI-GARCH model combining the continuous process with the jump behavior of

the oil price is as follows:

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Eq (2) is the conditional mean function of the Brent crude oil returns. denotes

the constant term. {i=1, 2 …p},

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respectively. The error term is said to follow a GARCH (l,k) process (Bollerslev,

1986). denotes the white noise sequence. and denote the independent
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normal random variables.

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Let denote the discrete counting process governing the numbers of jumps.

Suppose it follows the Poisson distribution and is conditional on the information set
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with the parameter > 0, the probability density function is as follows (Chan and
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Maheu, 2002):

Consider the ARJI (r, s) model, both parameters are equal to 1 in our empirical

analysis. Let denote the conditional jump intensity which is equal to the

conditional expected value of the counting progress (Chan and Maheu, 2002):

Here represents the innovation to (Chan and Maheu, 2002). This

jump intensity residual can be calculated as follows:

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Having observed and according to the Bayes’s rule, we can calculate the

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ex-post probability of the occurrence of j jumps at time t as follows:

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The conditional density of returns is as follows (Chan and Maheu, 2002; Maheu

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and McCurdy, 2004):

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To derive our model’s conditional variance, let denote the jump

component, because the ARJI-GARCH model is a discrete mixture of distributions,

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the ith uncentered moment of is as follows (Chan and Maheu, 2002):

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Standard calculation shows the second conditional moment of to be (Maheu

and McCurdy, 2004):

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According to Gronwald (2012), the conditional variance can be decomposed

into two separate parts: the diffusion-induced component and the jump-induced

component. The conditional variance can be shown as follows:

The conditional variance of returns is an increasing function of the jump intensity,

whereas the conditional mean of returns can be increasing or decreasing depending on

the sign of (Chan and Maheu, 2002).

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Given sample size T, the log-likelihood function can be written as follows (Tang

et al., 2010):

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Let denote all the parameters to be estimated.

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3.3 The ARMA-GARCH model

In order to examine how positive and negative categories of the Brent crude oil

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returns affect agricultural commodities, we decompose the Brent crude oil returns into
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positive and negative categories. What’s more, to observe the response of agricultural

commodities to the jump behavior of Brent crude oil returns, we also integrate the
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jump intensity into the model as follows (Tang et al., 2010):

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denotes the returns of agricultural commodities, denotes the white noise

sequence, = Min ( , 0) denotes the negative crude oil returns, = Max

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( , 0) denotes the positive crude oil returns, and denotes the jump intensity series

of the crude oil returns (Tang et al., 2010):

The error term usually follows a GARCH progress of order (1, 1) in the

empirical analysis. denotes the conditional heteroskedasticity of the white noise

series.

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4. Data and experimental results

In our paper, we select six kinds of agricultural commodities including strong

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wheat, corn, soybean, bean pulp, cotton and natural rubber. It is well known that data

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frequency plays fundamental roles in the process of price transmission from oil prices

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to agricultural prices (Nazlioglu, 2011). Therefore, our study adopts 2257 daily

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observations from September 23, 2004 to April 3, 2014. The six kinds of agricultural

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commodity price indices are derived from the official database of China's Webstock

(http://www.wenhua.com.cn/) and the Brent crude oil spot price is derived from the
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U.S. Energy Information Administration (EIA). To ensure the consistency and
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comparability among different data, we select all data appearing at the same date in

the seven time series. Returns are defined as follows and parameters are estimated by
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the maximum likelihood estimation (MLE) method.

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4.1 descriptive statistics

As shown in Table 1, the standard deviation of the Brent crude oil index is the

largest one, indicating that it has the most violent fluctuations. In addition to the

strong wheat index owning the positive skewness, the other commodity indices are

negatively skewed. As for the kurtosis, higher values of the kurtosis indicate that the

distributions of all time series have characteristics of sharp peaks and fat tails.

According to the Jarque-Bera test, all time series reject the normal distribution

assumption at the 1% level. In view of the property of the skewness and kurtosis, we

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can confirm that none of the time series follow the normal distribution. And in light of

the Ljung-Box Q and Q2 statistics, all series own the property of conditional

heterskedasticity and autocorrelation. Thus, it is reasonable to adopt the GARCH

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model.

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Table 1

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Summary statistics (2004-2013)
Strong Natural
Variable Brent oil Corn Soybean Bean pulp Cotton
Wheat Rubber

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Mean 0.0360 -0.0283 0.0000 0.0122 0.0359 -0.0104 -0.0082
Std. 2.2014 0.7227 0.6942 1.1801 1.3799 1.0374 1.9035
Skewness -0.1635 0.2508 -0.0381 -0.2796 -0.1681 -0.1740 -0.1484
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Kurtosis 10.3887 8.6314 9.6587 6.8821 5.0683 9.6912 3.7952
*** *** *** *** *** ***
Jarque-Bera 5141.8270 3004.6080 4168.3540 1446.0510 412.7313 4219.9400 67.7135***
Q(10) 27.2695*** 20.0143** 53.7559*** 30.6272*** 24.4874*** 23.9341*** 33.8686***
Q2 (10) 342.0915*** 158.3536*** 232.0698*** 1164.5370*** 703.8324*** 1592.7290*** 433.2582***
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Note: ***, ** indicate statistical significance at the 1 and 5 percent level of significance, respectively.
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Since most time series variables have a unit root, without considering their unit

root property, we cannot directly use these data (Fang and You, 2014). To examine the
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stationary of these data, we conduct the unit root test by the traditional Augmented
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Dickey–Fuller (ADF) test (Agiakloglou and Newbold, 1996), the Phillips and Perron

(PP) statistic (Burke, 1996) and the Kwiatkowski-Phillips-Schmidt-Shin (KPSS) test

(Kwiatkowski et al., 1992). The null hypothesis of the ADF and PP tests with the

constant term and linear trend is that time series is not stable. In other words, there

exists unit root. KPSS test is carried out after removing the trend term of the original

time series, the null hypothesis is that time series is stable in the long term. If the ADF

and PP tests cannot reject the null hypothesis and KPSS test rejects the null

hypothesis, we can infer that the time series is nonstationary.

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As shown in Table 2, contrary to the KPSS test, the seven price indices series

cannot reject the null hypothesis according to the ADF and PP tests, suggesting that

all of the price indices series are not stable. However, all the returns indices series

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reject the null hypothesis in terms of the ADF and PP tests, in contrast to the results of

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the KPSS test. Therefore, we can infer that all of the returns indices series are stable

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and do not exist unit root.

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Table 2
Unit root and stationary tests

Level First Difference

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Variable
ADF PP KPSS ADF PP KPSS

Brent oil -2.3148 -2.3548 3.5807*** -46.5353*** -46.5304*** 0.0607

*** *** ***
Strong Wheat -3.7777 -3.7791 5.3690 -51.0868 -51.0287 0.0439
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*** *** ***

Corn -1.7998 -1.9984 0.8101 -46.5297 -47.1012 0.1796
*** *** ***
Soybean -2.8302 -2.8028 4.1689 -52.9629 -52.6528 0.0725
*** *** ***
Bean pulp -1.5419 -1.5899 4.6372 -49.8480 -49.7970 0.1360
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** *** ***
Cotton -1.6452 -1.8590 0.7145 -46.3791 -47.0110 0.1047
*** *** ***
Natural Rubber -1.5240 -1.6630 1.1957 -49.5440 -49.5254 0.0950
Note: (1) ADF and PP statistics adopt t-Statistic for judgment, while KPSS statistics adopt LM-Statistic for
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judgment. (2) ***, ** indicate statistical significance at the 1 and 5 percent level of significance, respectively.
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As shown in Fig. 1 and Fig. 2, from 2004 to 2014, the fluctuations of the Brent

crude oil spot price are severe. And when oil price jumps appear, the volatility rate of

the oil price will change dramatically. According to Fig. 3 we can find that the

volatility clustering phenomenon of the six indices series are obvious, a large (small)

volatility is always followed by large (small) volatilities, indicating that price

volatilities in the six indices series can be forecast to some extent (Haixia and Shiping,

2013). Thus it indicates that the GARCH effects exist in the six indices series.

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160 20
Brent Crude Oil Spot Price ($) Brent Crude Oil Growth Rate (%)
140 15
120 10
100 5
80 0

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60 -5

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40 -10
20 -15

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0 -20

2008
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

2004
2005
2006
2007

2009
2010
2011
2012
2013
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Fig. 1 Time Series plots of Brent oil.

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Volatility of Brent Crude Oil (%)
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20

15

10
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5
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0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

the diffusion-induced component the jump-induced component the total volatility of crude oil
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Fig. 2 The votility rate of Brent crude oil.

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1200 8
Strong Wheats Index (RMB) Strong Wheats Growth Rate (%)
1000 6

800 4

600 2

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400 0

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200 -2

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0 -4

2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

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1400 6
Corns Index (RMB) Corns Index Growth Rate (%)

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1200 4
1000
2
800
0
MA
600
-2
400

200 -4

0 -6
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2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2007
2004
2005
2006

2008
2009
2010
2011
2012
2013
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1600 8
Soybeans Index (RMB) Soybeans Index Growth Rate (%)
1400 6
1200 4
CE

1000 2
800 0
600 -2
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400 -4
200 -6
0 -8
2012
2004
2005
2006
2007
2008
2009
2010
2011

2013
2011
2012
2004
2005
2006
2007
2008
2009
2010

2013

2500 8
Bean pulps Index (RMB) Bean pulps Index Growth Rate (%)
6
2000
4

1500 2
0
1000 -2
-4
500
-6
0 -8
2004
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

2005
2006
2007
2008
2009
2010
2011
2012
2013

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1400 8
Cottons Index (RMB) Cottons Index Growth Rate (%)
1200 6

1000 4
2
800
0
600

T
-2
400 -4

P
200 -6

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0 -8
2007

2010

2013
2004
2005
2006

2008
2009

2011
2012

2010
2004
2005
2006
2007
2008
2009

2011
2012
2013
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2500 8
Natural Rubbers Index (RMB) Nature Rubbers Growth Rate (%)

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6
2000
4

1500 2
0
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1000
-2
-4
500
-6
0 -8
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2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

2012
2004
2005
2006
2007
2008
2009
2010
2011

2013
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Fig. 3 Time series plots of six kinds of agricultural commodities.

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4.2 Application of the ARMA model to the Brent oil returns (2004-2014)
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According to the results shown in Table 3, in addition to the constant term, all

parameters are significant at the 1% level. Meanwhile, by comparing different models,

we find that the ARMA (2, 2) model has the minimum Akaike information value, so

we adopt the ARMA(2,2) model.

Table 3
ARMA model on Brent oil returns (2004–2014).
Variable Coefficient Std. Error t-Statistic Prob.
0.0357 0.0466 0.7667 0.4434
***
-0.6908 0.0167 -41.3142 0.0000
-0.9651*** 0.0161 -59.8933 0.0000
***
0.7109 0.0167 42.4737 0.0000

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0.9655*** 0.0161 59.9838 0.0000

***
Note: (1) , , , , are the parameters of ARMA(2,2), defined in Eq.(1). (2) indicate statistical
significance at the 1 percent level of significance.

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4.3 Application of the ARJI-GARCH model to the Brent crude oil returns

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(2004-2014)

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According to the results in Table 4, the coefficients of ARMA (2, 2) model ( ,

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, , ) are significant at the 1% level except that the constant term is

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significant at the 5% level. The coefficients of GARCH (1, 1) model ( , , ) are

significant at the 10%, 5%, 1% level respectively, indicating that the Brent crude oil
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has significant GARCH effect. According to Fig. 2, it is not hard to find that the
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volatility rate of the Brent crude oil index returns maintained at a higher level in 2008.

However, during the period from 2004 to 2007 and the period from 2009 to 2014, the
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volatility rate is relatively lower, indicating that the time series of the Brent crude oil
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index returns has obvious volatility clustering phenomenon, so it is appropriate to

employ the GARCH model. As shown in table 3, the mean of the jump size ( ) is
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significant at the 10% level and the variance ( ) is significant at the 1% level,

indicating once the international oil market is under influence of some abnormal

information, the oil price will respond immediately, or even will appear some extreme

movements, such as price jumps. In addition, the coefficient of the jump intensity ( )

is significant at the 10% level and the other two coefficients ( , ) are significant at

the 1% level, demonstrating it is reasonable to employ the ARJI model. The positive

coefficient of the parameters ( , , ) are 0.0049, 0.9820 and 0.1915, respectively,

suggesting that the current jump intensity ( ) is mainly affected by the previous jump
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intensity. According to Fig. 4, we can find that the jump intensity of the Brent crude

oil index returns mainly stays between 0 and 1. However, once the international oil

market is affected by abnormal information, the jump intensity will

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change dramatically. For example, under impact of the spreading subprime crisis in

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2008, the oil price fluctuated violently and the jump intensity reached 1.4860 on

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January 12, 2009. So it is clear that the jump intensity of oil price is time-varying and

will be influenced by external information. In addition, according to the Ljung-Box

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statistics, the standardized residual series cannot reject the null hypothesis,
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indicating that the time series do not exist correlation, thus it is reasonable to employ

the ARJI-GARCH model.

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Table 4
ARJI–GARCH on Brent oil returns (2004–2014).
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Variable Coefficient Std Error T-Stat. Signif.

**
0.0468 0.0188 2.4949 0.0126
CE

***
1.2230 0.1890 6.4692 0.0000
***
-0.6617 0.1789 -3.6979 0.0002
***
-1.2263 0.1913 -6.4092 0.0000
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***
0.6675 0.1808 3.6912 0.0002
*
0.0054 0.0032 1.7204 0.0854
**
0.0103 0.0049 2.1129 0.0346
***
0.9814 0.0063 155.3198 0.0000
2.3583*** 0.3722 6.3358 0.0000
*
-0.3548 0.2054 -1.7275 0.0841
*
0.0049 0.2054 1.7236 0.0848
***
0.9820 0.0093 106.0322 0.0000
***
0.1915 0.0719 2.6654 0.0077
2.3619 [0.7971]
Note: (1) , , , , are the parameters of ARMA(2,2), defined in Eq.(2). (2) , and are the
parameters of GARCH (1,1), defined in Eq.(3). (3) and are the mean and variance of the jump size
respectively. (4) , , are the parameters of jump intensity , defined in Eq.(6). (5) is the Ljung-Box
test statistics for serial correlation in the squared standardized residuals with 5 lags and the value in the square
bracket indicates the significance level. (6) ***, **, * indicate statistical significance at the 1, 5 and 10 percent level
of significance, respectively.

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1.6
Jump Intensity of Crude Oil
1.4
1.2
1.0

T
0.8

P
0.6

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0.4
0.2

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0.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Fig. 4 Jump intensity of Brent oil (2004-2014).

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4.4 Application of the ARMA-GARCH model to agricultural commodity indices
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returns

According to the Ljung-Box Q2 statistics, the standardized residual series of the

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six indices returns with 20 lags are not significant at the 1% level, indicating that the
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six residual series do not exist with autocorrelation, so it is appropriate and effective
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to employ the ARMA-GARCH model.

As shown in Table 5, the coefficients of GARCH (1, 1) model , and are

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significant at the 5% level, indicating that the six kinds of agricultural commodities

have significant GARCH effects. Both coefficients and are statistically

significant at the 10% level at least, demonstrating that all agricultural commodities

are affected by the positive and negative oil price shocks. In order to compare the

coefficients and , the likelihood ratio (LR) test is adopted. The null hypothesis

of the test is . We get the maximum likelihood function by

constructing the constrained model, where denotes all the parameters to be

estimated. And is the maximum likelihood function of the unconstrained

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model, where denotes all the parameters to be estimated. The LR statistics follow

the chi-square distribution if the null hypothesis is valid. And if , we

cannot reject the null hypothesis, that is to say, , otherwise, we will reject the

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null hypothesis. According to the results from the LR test in Table 5, except for the

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cotton index returns, the other five agricultural commodity indices returns reject the

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null hypothesis at the 10% level at least, indicating that oil price shocks have

asymmetric effects on strong wheat, corn, soybean, bean pulp and natural rubber. By

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comparison, we find that only the natural rubber index returns are more sensitive to
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positive oil price shocks, in contrast with strong wheat, corn, soybean and bean pulp

indices returns, demonstrating that most agricultural commodities are more sensitive
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to negative oil price shocks.

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In addition, we find that only natural rubber index returns are affected by the

current and previous jump intensity at the 1% level, while the rest of the agricultural
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commodities indices returns fail to respond to the jump intensity of the crude oil price.
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The coefficients of and are -2.5571 and 2.4323, respectively, indicating that

natural rubber is negatively affected by the current jump intensity while positively

affected by the previous jump intensity. Thus we can infer that after overreacting to

the current jump intensity of the oil price, natural rubber tends to adjust back to a

reasonable level in the next period (Wang and Zhang, 2014).

Table 5
AR-GARCH model on the agricultural commodity markets (2004-2014).
parameter strong wheat corn soybean Bean pulp cotton Natural rubber
-0.0040 0.0102 0.0017 0.0365 -0.0116 -0.0093
** **
0.1146 0.2094 0.0972 0.2123 0.4577 0.4651***

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0.4025*** -0.2965** 0.1307 0.0639 0.0575 -0.1373

** * *** **
-0.1209 -0.2887 -0.1835 -0.2913 -0.4495 -0.4918***
-0.3941** 0.2974** -0.0799 -0.0123 -0.0724 0.1992*
0.1911 -0.4564 0.2838 0.2615 -0.1527 -2.5571***
-0.1807 0.4603 -0.2373 -0.2418 0.1139 2.4323***

T
0.0271*** 0.0263** 0.0928*** 0.1147*** 0.0451 *** 0.1704 ***
0.0327*** 0.0405*** 0.1056*** 0.1520*** 0.0251* 0.1284***

P
0.0017 ** 0.0063*** 0.0125*** 0.0160*** 0.0114*** 0.0609***

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0.0543*** 0.0801*** 0.0815*** 0.0506*** 0.1070*** 0.0654***
*** *** *** *** ***
0.9444 0.9106 0.9113 0.9402 0.8838 0.9179***

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11.6420 14.3950 11.8701 15.5979 21.3123 21.6821
[0.9278] [0.8099] [0.9205] [0.7412] [0.3790] [0.3580]
-2154.5004 -2095.9088 -3168.5654 -3636.8160 -2695.8941 -4462.6025

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-2158.9864 -2100.4053 -3170.1386 -3639.6391 -2696.8250 -4464.1992
*** *** * **
8.9720 8.9930 3.1464 5.6462 1.8618 3.1934*
Note: (1) , , , , are parameters of ARMA(2, 2), defined in Eq.(14). (2) and are
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coefficients of the current and the first-order lag jump intensity of the oil price respectively, defined in Eq.(14). (3)
and are coefficients of the positive and negative oil price shocks respectively, defined in Eq.(14). (4) ,
and are parameters of GARCH (1, 1), defined in Eq.(16). (5) is the Ljung-Box test statistics for
serial correlation in the squared standardized residuals with 20 lags and the value in the square bracket indicates
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the significance level. (6) is the maximum likelihood value in the unconstrained model, is the
maximum likelihood value in the constrained model ( ), LR denotes the likelihood ratio, where LR = 2
***, **, *
( - ). (7) indicate statistical significance at the 1, 5 and 10 percent level of significance,
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respectively.
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5. Discussions
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5.1 The oil price is characterized by volatility clustering and jump behavior

The volatility clustering means that a large (small) volatility is always followed

by large (small) volatilities (Haixia and Shiping, 2013). The jump behavior suggests

that the oil price perhaps will sharply rise up or fall down when affected by

unexpected events. Askari and Krichene (2008) also found that oil price dynamics had

characteristics of high volatility, high intensity jumps and strong upward drift during

2002-2006. Yuan et al. (2014) pointed out that the oil price series showed

time-clustering behavior and long-range correlations. According to Wang and Zhang

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(2014), the volatility clustering feature resulted from investors’ different response to

oil price changes. In our opinions, the volatility clustering phenomenon of global oil

price is closely related with the development of oil futures in recent years. Oil futures

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brings oil and finance together, and the financial activities gradually integrate into oil

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trading activities. Once the oil price appears small fluctuations, in order to avoid risks,

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hedging transactions will be implemented more frequently in the oil futures market.

As a result, such behaviors will lead to further volatilities in the oil price and finally

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perhaps trigger volatility clustering phenomenon. As for the jump behavior, in the past
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few years, the international environment has become more complex than before,

which brings more uncertainty for the global oil price. In particular, unexpected
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events may lead to the jump behavior appearing in the process of oil price volatility.
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For example, the oil price took a nosedive in the crisis between 2008 and 2009 and

accordingly the jump intensity of the oil price was as high as 1.4860 on January 12,
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2009.
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5.2 The oil price shocks have different effects on agricultural commodities

In the paper, the six kinds of agricultural commodities can be divided into two

categories: One is the food crops, including strong wheat and corn; the other is the

cash crops, including soybean, bean pulp, cotton and natural rubber. In

comparison with the two types of agricultural commodities, we find that the impact of

oil price shocks on cash crops is stronger than that on food crops. The discrepancy

perhaps can be explained as follows: (1) The external dependencies on imports are

different. The food crops are less dependent on foreign imports than the cash
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crops. According to relevant data from the Information Center of National Food and

Oil Organization, in 2011 the self-sufficiency rate of wheat and corn were 98.9% and

99.1%, respectively. Both staple food production capacities can basically meet the

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domestic consumption needs, therefore the food crops are less affected by external

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factors, while the external dependency of cash crops is relatively higher. According to

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China's National Bureau of Statistics, in 2013, China imported 63.38 million tons of

soybeans, accounting for 80% of China’s soybean market. At the same time, based on

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data from China Feed Industry Association, the production of bean pulp in China
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mainly relies on imported soybeans and its external dependency was as high as 82%

in 2012. According to the National Statistics Bureau, the self-sufficiency rate of

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cotton is unstable in China and its external dependency reached 30% in 2010.
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According to the China Rubber Industry Association, the external dependency on

natural rubber in 2012 was closed to 80% in China. Thus the high external
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dependencies lead to the cash crops being more susceptible to the influence of
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external factors, such as oil price shocks. (2) The cost-push effects of the oil price are

different. For food crops, the impact of oil price shocks is mainly reflected in the cost

of production inputs. Nowadays, agricultural modernization and mechanization level

in China is lower than that in developed countries. Food crops are not sensitive to

changes in the cost of inputs, therefore, oil price shocks have fewer effects on food

crops. For cash crops, oil price shocks are passed to them mainly by the costs from

transportation as well as the related production and processing process. Thus cash

crops are more closely associated with oil price shocks. (3) The linkages with

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economic activity are different. As the fundamental means of subsistence, food crops

are closely related to people's daily lives. While as industrial raw material, cash crops

have a higher economic value and commodity rate, closely related to economic

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activity. Compared with people's daily lives, economic activity is more susceptible to

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oil price fluctuations.

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5.3 The oil price shocks on most agricultural commodities are asymmetric

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According to the results from the LR test, we find that except of cotton, the rise

and fall in the oil price have different effects on the other five agricultural
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commodities. Therefore, we can infer that oil price shocks have asymmetric effects on
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most agricultural commodities. For most agricultural commodities, they are more

sensitive to the fall in the oil price, such as strong wheat, corn, soybean and bean pulp,
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while natural rubber are more easily affected by the rise in the oil price. Generally,
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there are three views on the issue due to different research objectives and method: the

first view is that oil price shocks have asymmetric effects (Iwayemi and Fowowe,
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2011; Beckmann and Czudaj, 2014). The second one is that actually the asymmetric

effects are limited (Scholtens and Yurtsever, 2012; Kilian and Vigfusson, 2009). The

last one thinks that the neutrality hypothesis is valid (Nazlioglu and Soytas, 2011). As

for the reasons for such asymmetries, Iwayemi and Fowowe (2011) attributed it to the

reallocation effects and adjustment costs. According to Zhang and Chen (2011),

people were sensitive to oil price volatilities due to irrationality of many individual

investors in China which in turn incurred more speculations in the market. In our

study, the asymmetric effects of oil price shocks on most agricultural commodities
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perhaps can be attributed to the following explanations: on the one hand, the rise in oil

the price will lead to an increase in the price of agricultural commodities by raising

the cost of materials used for the products. At the moment, the irrational investors are

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inclined to trade in the stocks, then will be easily hung up in the high price. On the

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other hand, when the oil price falls, the price of agricultural commodities tends to

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decline, and some investors are anxious to trade out stocks to recoup their losses.

Such operations will inevitably increase the volatility in agricultural futures markets.

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So the irrational behavior of investors will lead to the oil price shocks showing
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asymmetric impacts.

5.4 The jump intensity of the oil price has different influence on agricultural
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commodities
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In contrast to other five agricultural commodities, only natural rubber is affected

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by the jump intensity of the oil price. This conclusion is supported by Wang and

Zhang (2014), who also pointed out that the jump intensity of the oil price had
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different impacts on the four commodity markets. We can see that the current jump

intensity ( ) of the oil price has a negative effect on the natural rubber index returns.

As the jump intensity of the oil price increases, the natural rubber index returns tend

to decline. While the first-order lag jump intensity ( ) of the oil price has a

positive impact on natural rubber index returns, indicating that natural rubber index

returns will react to the current jump intensity of the oil price positively and make an

opposite adjustment in the next period. Only natural rubber is affected by the jump

intensity of the oil price, there maybe exist two reasonable explanations: (1)
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Compared with the other agricultural commodities, natural rubber is widely used in

industry and has industrial property, and fluctuations in its futures price are broadly

consistent with the changes in economic activities. As the oil price jumps upwards,

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the economy will decline, resulting in the fall in the natural rubber price. Conversely,

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when the oil price jumps downwards, it is beneficial to the growth of the economy

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and the increase of the natural rubber price. (2) For the other five agricultural

commodities, because the Dalian Commodity Exchange and Zhengzhou Commodity

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Exchange are mainly engaged in agricultural commodity futures trading, there are
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various kinds of agricultural commodities being traded on the market. The two

commodity exchanges can attract more hedgers and speculators to participate in

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trading activities to improve futures market liquidity and promote the futures market,
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which finally contributes to hedging against oil price risk. In contrast, as a raw

material, the natural rubber is listed on Shanghai Futures Exchange with copper,
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aluminum and other industrial products. There is only one kind of agricultural
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commodity future on the Shanghai Futures Exchange, resulting in relatively inactive

transactions in agricultural commodities and weak abilities to resist risks. Therefore,

when the jump intensity of the oil price increases, the crude oil market will become

more volatile. For natural rubber, once it is affected by the current jump intensity of

the oil price positively, it needs to make an opposite adjustment in the next period. In

a word, the jump behavior of the oil price undoubtedly will increase the risk of natural

rubber trade. Therefore, relevant departments should further enrich the kinds of

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agricultural commodity futures and make the agricultural commodity futures market

more active.

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6. Conclusion

P
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In the paper, we investigate the impact of global oil price shocks on six kinds of

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agricultural commodities in China by adopting the ARJI-GARCH model and

ARMA-GARCH model. The global oil price fluctuations are divided into two parts:

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one is the smooth fluctuation under the influence of daily information, and the other is
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the jump behavior caused by the emergency. Price volatility process is regarded as a

combination of continuous process and jump process. The main conclusions are as
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follows:
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Firstly, the oil price is characterized by volatility clustering and jump behavior.

As the oil price begins to fluctuate, people will deal in hedging transactions frequently
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in the oil futures market to avoid risks, which finally will lead to further wild swings
AC

in the oil price. Oil price will also manifest some jump behaviors under the influence

of unexpected political and economic events. Secondly, oil price shocks have different

effects on agricultural commodities. Cash crops are more vulnerable to the effect of

oil price shocks than food crops. Thirdly, oil price shocks on most agricultural

commodities are asymmetric. For strong wheat, corn, soybean and bean pulp, the

effect of negative oil price shocks is stronger than that of positive oil price shocks,

while the converse is true for natural rubber. Finally, the jump intensity of the oil price

has different impacts on agricultural commodities. In contrast to the other five

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agricultural commodities, only natural rubber is under influence of the jump intensity

of the oil price.

Our results deserve particular attention from policy makers and market investors

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in China. First of all, early warning and response mechanisms should be established.

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They are effective to cope with the global oil price fluctuations, such as the

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diversification of global oil imports and increasing the oil reserves. Secondly, the

domestic agricultural commodities reserve should be strengthened. It is helpful to be

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effectively resistant to fluctuations in the global oil price. In the end, the kinds of
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agricultural commodity futures should be enriched. It is conductive to make the

agricultural commodity futures market become more active. In sum, it is good for
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policy makers and market investors to respond effectively to global oil price shocks
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and mitigate the price volatility of agricultural commodities.

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Acknowledgments
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This research is Supported by the Fundamental Research Funds for the Central

Universities （20720140001 ）and also supported by Program for New Century

Excellent Talents in University of Ministry of Education of China

(No.NCET-12-0327).

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Highlights

• We investigated the effect of oil price shocks on China’s agricultural commodities.

• The oil price shocks had different effects on agricultural commodities.

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• The oil price shocks on most agricultural commodities were asymmetric.

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• The natural rubber was under the influence of the jump intensity of the oil price.

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