Are agribusiness stocks an investor safe haven?

Abstract

Purpose – The purpose of this paper is to determine how an index of agribusiness stocks performs relative to the S&P 500 particularly in times of recession. Design/methodology/approach – Using value-weighted indexes of agribusiness stocks, large cap US stocks, and copula estimation, the paper quantifies the correlation in potential investment portfolios. The information obtained from the copula estimated dependence measures and Value at Risk (VaR) allows to examine the diversification benefits of holding agribusiness stocks in the portfolio relative to the S&P 500. Findings – The results provide limited evidence that the addition of agribusiness stocks to a portfolio are able to provide significant diversification benefits to a portfolio of domestic equities, as represented by the S&P 500 index. The VaR analysis also indicates the risk of extreme losses remained relatively stable both across time and portfolio weightings. Research limitations/implications – While this research examines a broad-based agribusiness stock index, there exists a number of sub-assets classes within the analyzed index that should be analyzed to see if the offer benefits to investors. In addition, only stocks traded on US-based stock indexes are included in this analysis; as such, the authors would like to extend the research to have a more global approach. Practical implications – The findings suggest that investors who are looking to a broad-based agribusiness stock index to provide more diversification in their portfolio, may find it unattractive from a both a risk management and profit maximizing perspective. However, that does not mean that the agribusiness stock index might be an affective complement to a portfolio that contains multiple other assets classes. Originality/value – The issue of correlation convergence during financial crises is one of great concern to investors. To the authors’ knowledge, this is the first paper that uses copulas to evaluate the role of agribusiness stocks in an investor's portfolio.