Return and Volatility Spillovers Among Major Cotton Markets

ABSTRACT This study explores return and volatility transmission among major cotton markets. Several events have disrupted cotton supply and demand in recent years, leading to heightened price volatility and significant shifts in market interconnections. Using daily cotton futures prices from the United States, India, and China between May 2015 and January 2023, along with the 10‐step ahead forecast variance decomposition technique, this study examines return and volatility spillovers, as well as market interconnectedness. The findings reveal a sharp increase in interconnectedness between 2015 and early 2022, reflecting strong dependencies among these markets despite a trade war and the COVID‐19 pandemic. However, onset of the Russia‐Ukraine conflict and ensuing geopolitical fragmentation contributed to lower interconnectedness and return transmission since the middle of 2022. Information on interconnectedness and return transmission helps stakeholders better anticipate market fluctuations and implement strategies to mitigate risks in an increasingly uncertain economic environment.