EconPapers    
Economics at your fingertips  
 

Did the Renewable Fuel Standard Shift Market Expectations of the Price of Ethanol?

Christiane Baumeister (), Reinhard Ellwanger and Lutz Kilian ()

No 11740, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: It is commonly believed that the response of the price of corn ethanol (and hence of the price of corn) to shifts in biofuel policies operates in part through market expectations and shifts in storage demand, yet to date it has proved difficult to measure these expectations and to empirically evaluate this view. We utilize a recently proposed methodology to estimate the market's expectations of the prices of ethanol, unfinished motor gasoline and crude oil at horizons from three months to one year. We quantify the extent to which price changes were anticipated by the market, the extent to which they were unanticipated, and how the risk premium in these markets has evolved. We show that the Renewable Fuel Standard (RFS) is likely to have increased ethanol price expectations by as much $1.45 in the year before and in the year after the implementation of the RFS had started. Our analysis of the term structure of expectations provides support for the view that a shift in ethanol storage demand starting in 2005 caused an increase in the price of ethanol. There is no conclusive evidence that the tightening of the RFS in 2008 shifted market expectations, but our analysis suggests that policy uncertainty about how to deal with the blend wall raised the risk premium in the ethanol futures market in mid-2013 by as much as 50 cents at longer horizons. Finally, we present evidence against a tight link from ethanol price expectations to corn price expectations and hence to storage demand for corn in 2005-06.

Keywords: biofuels; corn; crude oil; gasoline; market integration; policy uncertainty; Risk premium; storage demand; term structure of price expectations (search for similar items in EconPapers)
JEL-codes: Q18 Q28 Q42 Q58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene
Date: 2017-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11740 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Did the Renewable Fuel Standard Shift Market Expectations of the Price of Ethanol? (2017) Downloads
Working Paper: Did the Renewable Fuel Standard Shift Market Expectations of the Price of Ethanol? (2017) Downloads
Working Paper: Did the Renewable Fuel Standard Shift Market Expectations of the Price of Ethanol? (2016) Downloads
Working Paper: Did the renewable fuel standard shift market expectations of the price of ethanol? (2016) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:11740

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... rs/dp.php?dpno=11740

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2019-10-15
Handle: RePEc:cpr:ceprdp:11740