Inside the Black Box: the Price Linkage and Transmission between Energy and Agricultural Markets

Xiaodong Du and Lihong Lu McPhail
Authors registered in the RePEc Author Service: Lihong Lu McPhail and Xiaodong Du ()

The Energy Journal, 2012, vol. Volume 33, issue Number 2

Abstract: Motivated by strong comovement and increasing volatility of energy and agricultural prices, we examine dynamic evolutions of ethanol, gasoline, and corn prices over the period of March 2005-March 2011. A structural change is found around March 2008 in the pairwise dynamic correlations between the prices in a multivariate GARCH model. A structural VAR (SVAR) model is then estimated on two subsamples, one before and one after the identified change point. Using the novel method of identification through heteroscedasticity, we exploit the time-varying price volatilities to fully identify the SVAR model. In the more recent period, ethanol, gasoline, and corn prices are found to be more closely linked with a strengthened corn-ethanol relation, which can be largely explained by the new developments of the biofuel industry and related policy instruments. Variance decomposition shows that for each market a significant and relatively large share of the price variation could be explained by the price changes in the other two markets. The results are robust to the inclusion of seasonal dummies and various representative macroeconomic and financial indicators.

JEL-codes: F0 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (54)

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Related works:
Working Paper: Inside the Black Box: the Price Linkage and Transmission between Energy and Agricultural Markets (2012)
Working Paper: Inside the Black Box: Price Linkage and Transmission Between Energy and Agricultural Markets (2011)
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