Geopolitical Risk and the Volatility of the International Grain Futures Market

Abstract

The current international landscape is turbulent and unstable, with geopolitical risk having emerged as a significant threat. Focusing on the grain futures market, this paper builds different geopolitical risk measures by random matrix theory and constructs GJR-GARCH-MIDAS models to investigate the impact of geopolitical risk on grain market volatility. The findings indicate that rolling-window modeling performs better in describing the overall volatility of wheat, corn, soybean, and rice markets, and two-factor models generally exhibit stronger explanatory power in most cases. Short-term volatility demonstrates obvious volatility clustering and high volatility persistence, without significant asymmetry. Additionally, realized volatility of wheat, corn, and soybean significantly exacerbates their long-run volatility, while geopolitical risks of different dimensions show varying directions and degrees of effects in explaining long-term volatility of the four submarkets. This study offers valuable insights into grain market volatility and geopolitical risk, contributing to agricultural futures investment and global food security.