Tail Risk Transmission in Agricultural and Energy Markets

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Abstract
This paper examines downside hedging, tail diversification, and extreme tail risk transmission between crude oil and agricultural commodity futures over two decades. We develop complementary indicators of downside dependence, including sign‐switching frequency and persistence, to assess tail risk dynamics, hedging effectiveness, and associated costs. Unlike conventional network measures, these indicators capture the stability and duration of adverse market relationships. Using the extreme downside correlation (EDC) and extreme downside hedge (EDH) frameworks, together with rolling‐window CVaR‐based regressions and correlation estimates, we analyse the sensitivity of agricultural futures to adverse shocks from crude oil, natural gas, and a broad commodity market index. Results show that tail risk transmission intensifies during periods of financial and geopolitical stress. Among agricultural commodities, lean hogs, soybeans, and corn consistently exhibit strong downside hedging capabilities and tail diversification benefits, highlighting their value for portfolio risk management under extreme market conditions.

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