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Speculation and Volatility Spillover in the Crude Oil and Agricultural Commodity Markets: A Bayesian Analysis

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  • Du, Xiaodong
  • Yu, Cindy L.
  • Hayes, Dermot J.

Abstract

This paper assesses the roles of various factors influencing the volatility of crude oil prices and the possible linkage between this volatility and agricultural commodity markets. Stochastic volatility models are applied to weekly crude oil, corn and wheat futures prices from November 1998 to January 2009. Model parameters are estimated using Bayesian Markov chain Monte Carlo methods. The main results are as follows. Speculation, scalping, and petroleum inventories are found to be important in explaining oil price variation. Several properties of crude oil price dynamics are established including mean-reversion, a negative correlation between price and volatility, volatility clustering, and infrequent compound Poisson jumps. We find evidence of volatility spillover among crude oil, corn and wheat markets after the fall of 2006. This could be largely explained by tightened interdependence between these markets induced by ethanol production.

Suggested Citation

  • Du, Xiaodong & Yu, Cindy L. & Hayes, Dermot J., 2009. "Speculation and Volatility Spillover in the Crude Oil and Agricultural Commodity Markets: A Bayesian Analysis," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49276, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea09:49276
    DOI: 10.22004/ag.econ.49276
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    More about this item

    Keywords

    Demand and Price Analysis; Financial Economics; Resource /Energy Economics and Policy;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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