Are Timber and Water Investments Safe-Havens?

What is it about?

Using a VAR model, we investigate volatility spillovers between natural alternative investments, i.e. timber and water, and a battery of traditional instruments comprising equities, bonds, crude oil, gold, real estate, shipping and currency, for the period 1/1/2010-9/30/2021. Results show that the sample markets are moderately integrated and total connectedness escalated during stress periods. Equities, crude oil, gold and currency are the net contributors of volatility spillovers, whereas real estate, shipping, bonds, timber and water are the net receivers of the diffused shocks. Moreover, we examine the hedging ability of timber and water by constructing optimal hedge ratios and portfolio weights.

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Why is it important?

Monitoring volatility spillovers among asset prices is imperative for regulators to form a policy framework in order to maintain financial stability. Furthermore, understanding which markets are the main senders and recipients of volatility spillovers is also crucial for investors, in their attempt to diversify their portfolios efficiently and benefit from the inclusion of uncorrelated assets. Finally, the estimated hedge ratios and portfolio weights pave the way for investors to implement specific hedging strategies for managing portfolio risk by using timber and water as hedging tools

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