Modelling volatility spillovers for bio-ethanol, sugarcane and corn
The recent and rapidly growing interest in biofuel as an 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. In the past, 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, using the multivariate diagonal BEKK conditional volatility model. The daily data used are from 31 October 2005 to 14 January 2015. The empirical results show that in 2 of 6 cases, there were significant negative co-volatility spillover effects, specifically corn on subsequent sugarcane co-volatility with corn, and sugarcane on subsequent corn covolatility with sugarcane. In the other 4 cases, there were 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.
|Biofuel, Futures prices, Returns, Spot prices, Volatility|
|21st International Congress on Modelling and Simulation: Partnering with Industry and the Community for Innovation and Impact through Modelling, MODSIM 2015 - Held jointly with the 23rd National Conference of the Australian Society for Operations Research and the DSTO led Defence Operations Research Symposium, DORS 2015|
|Organisation||Department of Econometrics|
Chang, C-L, McAleer, M.J, & Wang, Y-A. (2020). Modelling volatility spillovers for bio-ethanol, sugarcane and corn. In Proceedings - 21st International Congress on Modelling and Simulation, MODSIM 2015 (pp. 1001–1007). Retrieved from http://hdl.handle.net/1765/125330