Dynamic volatility connectedness, portfolio optimization, and hedging effectiveness in Türkiye’s agricultural markets: New evidence

This study investigates volatility spillovers, portfolio optimization, and hedging effectiveness between Turkish agricultural stocks (Bagfas Bandirma Gubre Fabrikalari AS (BBGF), Ege Gubre Sanayii AS (EGS), Gubre Fabrikalari TAS (GF), and Hektas Ticaret TAS (HT)) and key global agricultural commodity futures (Soybean, Wheat, and Sugar) from February 21, 2007, to December 27, 2022, employing the Diebold-Yilmaz and Dynamic Conditional Correlation models. Empirical results reveal moderate-to-high volatility interconnectedness among Turkish agricultural equities, low spillovers among global agricultural commodities, and very low agricultural stock-commodity transmissions. Generally, Turkish agricultural firms (global agricultural commodities) act as net volatility transmitters (receivers). The total volatility spillover index is very low at 27.4%, with Turkish agricultural stocks (global agricultural commodities) contributing the highest (lowest) to overall spillovers. Moreover, dynamic analysis demonstrates that the 2008 global financial crisis dramatically amplified volatility spillovers, particularly within the Turkish stock market, while the effect of the COVID-19 pandemic was indirect and significantly smaller. Additionally, only five of twelve agricultural stock-commodity portfolios exhibit statistically significant conditional correlations: BBGF-Wheat, EGS-Soybean, GF-Soybean, GF-Sugar, and HT-Wheat. These conditional correlations are predominantly negative, consistent with the diversification principles of Modern Portfolio Theory. Furthermore, for these portfolios, the following average optimal (minimum-variance) portfolio weights are determined: BBGF-Wheat (56%:44%), EGS-Soybean (32%:68%), GF-Soybean (26%:74%), GF-Sugar (55%:45%), and HT-Wheat (69%:31%). Finally, average optimal hedge ratio results reveal that BBGF positions can be hedged by shorting Wheat futures, while hedging GF, EGS, and HT positions requires taking long positions in Sugar and/or Soybean, Soybean, and Wheat futures, respectively.