Water, food, energy : searching for the economic nexus

Water, food and energy areas (WFE) are strongly interconnected and inseparable. Each depends on the other for a lot of concerns spanning from guaranteeing access to services, to environmental impact issue, to price volatility transmission. The development, use, and waste generated by demand for these resources drive global changes and fears of resource scarcity. To date, there is emerging a new approach to the concept of sustainable development which, in its articulation, requires a joint analysis of these three areas. “Any strategy that focuses on one part of the water-food-energy nexus without considering its interconnections risks serious unintended consequences” (World Economic Forum, 2011). In the past two years international organizations have organized several conferences to raise awareness of the WFE nexus and the reference literature is scarce so far (Bazilian et al., 2011). This work focuses on the existence of an economic link between the three areas that are the basis of the new concept of sustainable development. To this end, we focus on the transmission of price volatility among the three areas analyzed. Considering the purpose of this study a multivariate GARCH models are used to model time-varying conditional correlations and to investigate the volatility spillovers between water indexes, agricultural prices index and energy prices. Data used for water area is the S&P Global Water Index that provides liquid and tradable exposure to 50 companies from around the world that are involved in water related businesses. For food and energy sectors we used two sub-indexes of S&P GS-Commodity Index. Specifically we collect the spot index, a measure of the level of nearby commodity prices, for Agriculture-Livestock and Energy. Both the indexes are calculated primarily on a world production weighted basis, and comprise the principal physical commodities that are the subject of active, liquid futures markets. The weight of each commodity in the index is determined by the average quantity of production as per the last five years of available data. We use daily data spanning from November 16, 2001 to May 28, 2013. Results show that time-varying parameter models are different across time and between variables. Specifically, after the 2008 financial crises spillover effects are generally stronger. The novelty in this work is threefold. Firstly, the paper focuses on a topic of great relevance from an economic, environmental and ethical perspective, as recently outlined by many international organizations. The complex interactions and policy implications that consider all three sectors together need more work in order to effectively support decision-making. Secondly, it performs the first econometric analysis of the relationship among the three areas using a multivariate GARCH. Finally, the paper presents the first use of the S&P Global Water Index in an academic context, presenting this databank to the wider research community through the one of the uses that can be made of this resource