Climate Shocks, Commodity Prices, and Market Connectedness: Evidence from the Ivorian Cocoa Belt

Abstract This paper examines how local agro-climatic conditions in Côte d’Ivoire shape global cocoa price dynamics and cross-commodity shock transmission. Using monthly satellite-derived precipitation and temperature anomalies over the period January 1980 to December 2024, we employ a two-stage framework combining an EGARCH (1,2) model with a Time-Varying Parameter VAR (TVP-VAR) to assess spillovers across cocoa, coffee, sugar, and crude oil markets. Our results show that precipitation anomalies significantly reduce cocoa returns through a supply-side channel, while conditional volatility exhibits a pronounced leverage effect and moderate persistence. TVP-VAR estimates reveal a structural break in commodity market interconnectedness around 2008, with the Total Connectedness Index nearly tripling in the post-financialization period. Prior to 2008, cocoa operated as a net transmitter of shocks within the tropical commodity complex; thereafter, it transitioned into a net receiver, primarily absorbing macro-financial shocks from oil markets. Severe climatic episodes, however, temporarily override this financial regime and restore cocoa’s role as a systemic shock transmitter, a non-linear dynamic confirmed by our sub-sample robustness analysis. These findings underscore the regime-dependent interaction between agro-climatic fundamentals and commodity market financialization, with implications for climate risk management, commodity derivatives pricing, and early-warning systems for global food price instability. JEL code : Q11, Q54, C22, C58