Time-varying efficiency in food and energy markets: Evidence and implications

This paper analyses weak-form efficiency in daily spot and futures prices in the food and energy markets, given the simultaneous volatilities characterising prices in both markets. To determine the structural breaks and efficiency changes over time, we use the time-varying rolling Hurst exponent and threshold vector error correction models. Our main findings indicate that all of the studied commodities exhibit long-term efficiency and short-term inefficiencies that can be explained by global economic conditions: the 2008 global financial crisis, financialisation of commodities markets, and fluctuations in crude oil prices. Time-varying optimal weights minimising the portfolio risk show different patterns between food and crude oil. In terms of hedging effectiveness, food futures are better than crude oil futures. Therefore, optimal portfolios risk hedging requires an adequate rebalancing between spot and futures prices depending on markets conditions and the type of commodities considered. Investigation of the semi-strong efficiency form of these markets through the consideration of intra-day prices could constitute a future extension of the present work. •We investigate the weak efficiency of the food and energy markets.•All commodities exhibit long-term efficiency and short-term inefficiencies.•Short-term inefficiencies were accentuated during the 2008 global financial crisis.•Food futures are more effective for hedging than crude oil futures.•Semi-strong efficiency should be further investigated.