[go: up one dir, main page]
More Web Proxy on the site http://driver.im/
IDEAS home Printed from https://ideas.repec.org/p/ucm/doicae/1704.html
   My bibliography  Save this paper

Modelling Volatility Spillovers for Bio-ethanol, Sugarcane and Corn Spot and Futures Prices

Author

Listed:
  • Chia-Lin Chang

    (Department of Applied Economics Department of Finance National Chung Hsing University, Taiwan)

  • Michael McAleer

    (Department of Quantitative Finance National Tsing Hua University, Taiwan)

  • Yu-Ann Wang

    (Department of Applied Economics National Chung Hsing University Taichung, Taiwan)

Abstract
The recent and rapidly growing interest in biofuel as a green energy source has raised concerns about its impact on the prices, returns and volatility of related agricultural commodities. Analyzing the spillover effects on agricultural commodities and biofuel helps commodity suppliers hedge their portfolios, and manage the risk and co-risk of their biofuel and agricultural commodities. There have been many papers concerned with analyzing crude oil and agricultural commodities separately. The purpose of this paper is to examine the volatility spillovers for spot and futures returns on bio-ethanol and related agricultural commodities, specifically corn and sugarcane. The diagonal BEKK model is used as it is the only multivariate conditional volatility model with well-established regularity conditions and known asymptotic properties. The daily data used are from 31 October 2005 to 14 January 2015. The empirical results show that, in 2 of 6 cases for the spot market, there were significant negative co-volatility spillover effects: specifically, corn on subsequent sugarcane co-volatility with corn, and sugarcane on subsequent corn co-volatility with sugarcane. In the other 4 cases, there are no significant co-volatility spillover effects. There are significant positive co-volatility spillover effects in all 6 cases, namely between corn and sugarcane, corn and ethanol, and sugarcane and ethanol, and vice-versa, for each of the three pairs of commodities. It is clear that the futures prices of bio-ethanol and the two agricultural commodities, corn and sugarcane, have stronger co-volatility spillovers than their spot price counterparts. These empirical results suggest that the bio-ethanol and agricultural commodities should be considered as viable futures products in financial portfolios for risk management.

Suggested Citation

  • Chia-Lin Chang & Michael McAleer & Yu-Ann Wang, 2016. "Modelling Volatility Spillovers for Bio-ethanol, Sugarcane and Corn Spot and Futures Prices," Documentos de Trabajo del ICAE 2017-04, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    • Handle: RePEc:ucm:doicae:1704
    as

    Download full text from publisher

    File URL: https://eprints.ucm.es/id/eprint/40987/1/1704.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-131, February.
    2. Revoredo-Giha, Cesar & Zuppiroli, Marco, 2012. "Effectiveness of hedging within the high price volatility context," Working Papers 142546, Scotland's Rural College (formerly Scottish Agricultural College), Land Economy & Environment Research Group.
    3. Serra, Teresa, 2012. "Biofuel-related price volatility literature: a review and new approaches," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 126057, International Association of Agricultural Economists.
    4. Nelson, Daniel B., 1990. "ARCH models as diffusion approximations," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 7-38.
    5. Gabaix, Xavier & Laibson, David & Li, Deyuan & Li, Hongyi & Resnick, Sidney & de Vries, Casper G., 2016. "The impact of competition on prices with numerous firms," Journal of Economic Theory, Elsevier, vol. 165(C), pages 1-24.
    6. Thorsten M. Egelkraut & Philip Garcia & Bruce J. Sherrick, 2007. "The Term Structure of Implied Forward Volatility: Recovery and Informational Content in the Corn Options Market," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(1), pages 1-11.
    7. Michael McAleer & Christian M. Hafner, 2014. "A One Line Derivation of EGARCH," Econometrics, MDPI, vol. 2(2), pages 1-6, June.
    8. Guillaume Gaetan Martinet & Michael McAleer, 2018. "On the invertibility of EGARCH(p, q)," Econometric Reviews, Taylor & Francis Journals, vol. 37(8), pages 824-849, September.
    9. Ling, Shiqing & McAleer, Michael, 2003. "Asymptotic Theory For A Vector Arma-Garch Model," Econometric Theory, Cambridge University Press, vol. 19(2), pages 280-310, April.
    10. Chang, Chia-Lin & McAleer, Michael & Tansuchat, Roengchai, 2011. "Crude oil hedging strategies using dynamic multivariate GARCH," Energy Economics, Elsevier, vol. 33(5), pages 912-923, September.
    11. Teresa Serra & David Zilberman & José Gil, 2011. "Price volatility in ethanol markets," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 38(2), pages 259-280, June.
    12. Chang, Chia-Lin & Chen, Li-Hsueh & Hammoudeh, Shawkat & McAleer, Michael, 2012. "Asymmetric adjustments in the ethanol and grains markets," Energy Economics, Elsevier, vol. 34(6), pages 1990-2002.
    13. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(1), pages 122-150, February.
    14. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    15. Michael McAleer, 2014. "Asymmetry and Leverage in Conditional Volatility Models," Econometrics, MDPI, vol. 2(3), pages 1-6, September.
    16. Zhang, Dengjun & Asche, Frank & Oglend, Atle, 2014. "Ethanol and trade: An analysis of price transmission in the US market," Energy Economics, Elsevier, vol. 42(C), pages 1-8.
    17. López Cabrera, Brenda & Schulz, Franziska, 2016. "Volatility linkages between energy and agricultural commodity prices," Energy Economics, Elsevier, vol. 54(C), pages 190-203.
    18. Gitaru, Kelvin, 2015. "Impact Of Foreign Aid On Economic Growth," MPRA Paper 68145, University Library of Munich, Germany, revised 30 Jun 2016.
    19. Serra, Teresa, 2011. "Volatility spillovers between food and energy markets: A semiparametric approach," Energy Economics, Elsevier, vol. 33(6), pages 1155-1164.
    20. Massimiliano Caporin & Michael McAleer, 2012. "Do We Really Need Both Bekk And Dcc? A Tale Of Two Multivariate Garch Models," Journal of Economic Surveys, Wiley Blackwell, vol. 26(4), pages 736-751, September.
    21. de Gorter, Harry & Drabik, Dusan & Kliauga, Erika M. & Timilsina, Govinda R., 2013. "An economic model of Brazil's ethanol-sugar markets and impacts of fuel policies," Policy Research Working Paper Series 6524, The World Bank.
    22. Chia-Lin Chang & Michael McAleer, 2017. "A Simple Test for Causality in Volatility," Econometrics, MDPI, vol. 5(1), pages 1-5, March.
    23. Michael McAleer & Suhejla Hoti & Felix Chan, 2009. "Structure and Asymptotic Theory for Multivariate Asymmetric Conditional Volatility," Econometric Reviews, Taylor & Francis Journals, vol. 28(5), pages 422-440.
    24. Du, Feng & Zhang, Jiangfeng & Li, Hailong & Yan, Jinyue & Galloway, Stuart & Lo, Kwok L., 2016. "Modelling the impact of social network on energy savings," Applied Energy, Elsevier, vol. 178(C), pages 56-65.
    25. Sergio H. Lence & Dermot J. Hayes, 2002. "U.S. Farm Policy and the Volatility of Commodity Prices and Farm Revenues," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(2), pages 335-351.
    26. Massimiliano Caporin & Michael McAleer, 2008. "Scalar BEKK and indirect DCC," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 27(6), pages 537-549.
    27. Sendhil, R. & Kar, Amit & Mathur, V.C. & Jha, Girish K., 2013. "Price Discovery, Transmission and Volatility: Evidence from Agricultural Commodity Futures," Agricultural Economics Research Review, Agricultural Economics Research Association (India), vol. 26(1), June.
    28. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    29. Chang, C-L. & McAleer, M.J., 2017. "The Fiction of Full BEKK," Econometric Institute Research Papers TI 2017-015/III, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    30. Teresa Serra & José M. Gil, 2013. "Price volatility in food markets: can stock building mitigate price fluctuations?," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 40(3), pages 507-528, July.
    31. Trujillo-Barrera, Andres & Mallory, Mindy L. & Garcia, Philip, 2012. "Volatility Spillovers in U.S. Crude Oil, Ethanol, and Corn Futures Markets," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 37(2), pages 1-16, August.
    32. Chang, Chia-Lin & Huang, Biing-Wen & Chen, Meng-Gu & McAleer, Michael, 2011. "Modelling the asymmetric volatility in hog prices in Taiwan: The impact of joining the WTO," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 81(7), pages 1491-1506.
    33. Christian M. Hafner & Michael McAleer, 2014. "A One Line Derivation of DCC: Application of a Vector Random Coefficient Moving Average Process," Tinbergen Institute Discussion Papers 14-087/III, Tinbergen Institute.
    34. Nazlioglu, Saban & Erdem, Cumhur & Soytas, Ugur, 2013. "Volatility spillover between oil and agricultural commodity markets," Energy Economics, Elsevier, vol. 36(C), pages 658-665.
    35. Zhao, Jieyuan & Goodwin, Barry K., 2011. "Volatility Spillovers in Agricultural Commodity Markets: An Application Involving Implied Volatilities from Options Markets," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 103636, Agricultural and Applied Economics Association.
    36. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. "On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
    37. Jeantheau, Thierry, 1998. "Strong Consistency Of Estimators For Multivariate Arch Models," Econometric Theory, Cambridge University Press, vol. 14(1), pages 70-86, February.
    38. Hui-Guo Zhang & Chang-Lin Mei, 2017. "Discussion," International Statistical Review, International Statistical Institute, vol. 85(1), pages 38-40, April.
    39. Li Li Eng & Joohyung Ha, 2016. "The impact of financial crisis on bank revenue management," International Journal of Revenue Management, Inderscience Enterprises Ltd, vol. 9(4), pages 273-290.
    40. Hyun J. Jin & Darren L. Frechette, 2004. "Fractional Integration in Agricultural Futures Price Volatilities," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(2), pages 432-443.
    41. Hafner, Christian M. & Herwartz, Helmut, 2006. "A Lagrange multiplier test for causality in variance," Economics Letters, Elsevier, vol. 93(1), pages 137-141, October.
    42. Lisa Hjelm & UNICEF Office of Research - Innocenti, 2016. "The Impact of Cash Transfers on Food Security," Papers inores800, Innocenti Research Briefs.
    43. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
    44. Popp, J. & Lakner, Z. & Harangi-Rákos, M. & Fári, M., 2014. "The effect of bioenergy expansion: Food, energy, and environment," Renewable and Sustainable Energy Reviews, Elsevier, vol. 32(C), pages 559-578.
    45. Yuhua Li & Konari Uchida & Tongsheng Xu & Zhaoyang Wu, 2016. "The Impact of Foreign Entry on Chinese Banks," Review of Development Economics, Wiley Blackwell, vol. 20(1), pages 74-86, February.
    46. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
    47. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
    48. Zhang, Wei & Yu, Elaine A. & Rozelle, Scott & Yang, Jun & Msangi, Siwa, 2013. "The impact of biofuel growth on agriculture: Why is the range of estimates so wide?," Food Policy, Elsevier, vol. 38(C), pages 227-239.
    49. McAleer, Michael & Chan, Felix & Hoti, Suhejla & Lieberman, Offer, 2008. "Generalized Autoregressive Conditional Correlation," Econometric Theory, Cambridge University Press, vol. 24(6), pages 1554-1583, December.
    50. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
    51. Li, Maohua & Zéman, Zoltán & Li, Jing, 2016. "The Impact of CSR on Chinese Economic Development," Public Finance Quarterly, Corvinus University of Budapest, vol. 61(4), pages 500-515.
    52. Zibin Zhang & Luanne Lohr & Cesar Escalante & Michael Wetzstein, 2009. "Ethanol, Corn, and Soybean Price Relations in a Volatile Vehicle-Fuels Market," Energies, MDPI, vol. 2(2), pages 1-20, June.
    53. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chia-Lin Chang & Michael McAleer & Yu-Ann Wang, 2016. "Modelling volatility spillovers for bio-ethanol, sugarcane and corn," Documentos de Trabajo del ICAE 2016-03, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    2. Chia-Lin Chang & Yiying Li & Michael McAleer, 2018. "Volatility Spillovers between Energy and Agricultural Markets: A Critical Appraisal of Theory and Practice," Energies, MDPI, vol. 11(6), pages 1-19, June.
    3. Chia-Lin Chang & Michael McAleer & Guangdong Zuo, 2017. "Volatility Spillovers and Causality of Carbon Emissions, Oil and Coal Spot and Futures for the EU and USA," Sustainability, MDPI, vol. 9(10), pages 1-22, October.
    4. Chang, Chia-Lin & McAleer, Michael & Wang, Yanghuiting, 2018. "Testing Co-Volatility spillovers for natural gas spot, futures and ETF spot using dynamic conditional covariances," Energy, Elsevier, vol. 151(C), pages 984-997.
    5. Chia-Lin Chang & Michael McAleer & Jiarong Tian, 2019. "Modeling and Testing Volatility Spillovers in Oil and Financial Markets for the USA, the UK, and China," Energies, MDPI, vol. 12(8), pages 1-24, April.
    6. Chia-Lin Chang & Michael McAleer & Chien-Hsun Wang, 2017. "An Econometric Analysis of ETF and ETF Futures in Financial and Energy Markets Using Generated Regressors," IJFS, MDPI, vol. 6(1), pages 1-24, December.
    7. Chia-Lin Chang & Tai-Lin Hsieh & Michael McAleer, 2018. "Connecting VIX and Stock Index ETF with VAR and Diagonal BEKK," JRFM, MDPI, vol. 11(4), pages 1-25, September.
    8. Chia-Lin Chang & Chia-Ping Liu & Michael McAleer, 2016. "Volatility Spillovers for Spot, Futures, and ETF Prices in Energy and Agriculture," Tinbergen Institute Discussion Papers 16-046/III, Tinbergen Institute.
    9. Algieri, Bernardina, 2014. "The influence of biofuels, economic and financial factors on daily returns of commodity futures prices," Energy Policy, Elsevier, vol. 69(C), pages 227-247.
    10. Serra, Teresa & Zilberman, David, 2013. "Biofuel-related price transmission literature: A review," Energy Economics, Elsevier, vol. 37(C), pages 141-151.
    11. Chia-Lin Chang & Tai-Lin Hsieh & Michael McAleer, 2016. "Connecting VIX and Stock Index ETF," Tinbergen Institute Discussion Papers 16-010/III, Tinbergen Institute, revised 23 Jan 2017.
    12. Massimiliano Caporin & Michael McAleer, 2011. "Thresholds, news impact surfaces and dynamic asymmetric multivariate GARCH," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 65(2), pages 125-163, May.
    13. Michael McAleer, 2009. "The Ten Commandments For Optimizing Value‐At‐Risk And Daily Capital Charges," Journal of Economic Surveys, Wiley Blackwell, vol. 23(5), pages 831-849, December.
    14. Boubacar Maïnassara, Y. & Kadmiri, O. & Saussereau, B., 2022. "Estimation of multivariate asymmetric power GARCH models," Journal of Multivariate Analysis, Elsevier, vol. 192(C).
    15. R. Khalfaoui & M. Boutahar, 2012. "Portfolio Risk Evaluation: An Approach Based on Dynamic Conditional Correlations Models and Wavelet Multi-Resolution Analysis," Working Papers halshs-00793068, HAL.
    16. Chang, C-L. & Hsieh, T-L. & McAleer, M.J., 2016. "How are VIX and Stock Index ETF Related?," Econometric Institute Research Papers EI2016-07, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    17. Chang, Chia-Lin & McAleer, Michael, 2019. "The fiction of full BEKK: Pricing fossil fuels and carbon emissions," Finance Research Letters, Elsevier, vol. 28(C), pages 11-19.
    18. Chia-Lin Chang & Michael McAleer, 2017. "The Fiction of Full BEKK," Documentos de Trabajo del ICAE 2017-06, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    19. So, Mike K.P. & Chan, Thomas W.C. & Chu, Amanda M.Y., 2022. "Efficient estimation of high-dimensional dynamic covariance by risk factor mapping: Applications for financial risk management," Journal of Econometrics, Elsevier, vol. 227(1), pages 151-167.
    20. Mensi, Walid & Hammoudeh, Shawkat & Nguyen, Duc Khuong & Yoon, Seong-Min, 2014. "Dynamic spillovers among major energy and cereal commodity prices," Energy Economics, Elsevier, vol. 43(C), pages 225-243.

    More about this item

    Keywords

    BBiofuel; Spot prices; Futures prices; Returns; Volatility; Risk; Co-risk; Bio-ethanol; Corn; Sugarcane; Diagonal BEKK model; Co-volatility spillover effects; Hedging; Risk management.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucm:doicae:1704. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Águeda González Abad (email available below). General contact details of provider: https://edirc.repec.org/data/feucmes.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.