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Asymmetric Adjustment in the Ethanol and Grains Markets

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  • Chang, C-L.
  • Chen, L.H.
  • Hammoudeh, S.M.
  • McAleer, M.J.

Abstract

This paper examines the long- and short-run asymmetric adjustments for nine pairs of spot and futures prices, itemized as three own pairs for three different bio-fuel ethanol types, three own pairs for three related agricultural products, namely corn, soybeans and sugar, and three cross pairs that included hybrids of the spot price of each of the agricultural products and an ethanol futures price. Most of the spreads’ asymmetric adjustments generally happen during narrowing. The three ethanol pairs that contain the eCBOT futures with each of Chicago spot, New York Harbor spot and Western European (Rotterdam) spot show different long-run adjustments, arbitrage profitable opportunities and price risk hedging capabilities. The asymmetric spread adjustments for the three grains are also different, with corn spread showing the strongest long-run widening adjustment, and sugar showing the weakest narrowing adjustment. Among others, the empirical analysis indicates the importance of potentially hedging the spot prices of agricultural commodities with ethanol futures contracts, which sends an important message that the ethanol futures market is capable of hedging price risk in agricultural commodity markets. The short-run asymmetric adjustments for individual prices in the nine pairs (with exception of the corn own pair underscore the importance of futures prices in the price discovery and hedging potential, particularly for ethanol futures.

Suggested Citation

  • Chang, C-L. & Chen, L.H. & Hammoudeh, S.M. & McAleer, M.J., 2011. "Asymmetric Adjustment in the Ethanol and Grains Markets," Econometric Institute Research Papers EI 2010-78, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    • Handle: RePEc:ems:eureir:22151
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    Cited by:

    1. Zhang, Chuanguo & Chen, Xiaoqing, 2014. "The impact of global oil price shocks on China’s bulk commodity markets and fundamental industries," Energy Policy, Elsevier, vol. 66(C), pages 32-41.
    2. Carlotta Penone & Samuele Trestini, 2022. "Testing for asymmetric cointegration of Italian agricultural commodities prices: Evidence from the futures-spot market relationship," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 68(2), pages 50-58.
    3. Han, Liyan & Jin, Jiayu & Wu, Lei & Zeng, Hongchao, 2020. "The volatility linkage between energy and agricultural futures markets with external shocks," International Review of Financial Analysis, Elsevier, vol. 68(C).
    4. Awudu, Iddrisu & Wilson, William & Dahl, Bruce, 2016. "Hedging strategy for ethanol processing with copula distributions," Energy Economics, Elsevier, vol. 57(C), pages 59-65.
    5. Hernandez, Jose Areola & Shahzad, Syed Jawad Hussain & Uddin, Gazi Salah & Kang, Sang Hoon, 2019. "Can agricultural and precious metal commodities diversify and hedge extreme downside and upside oil market risk? An extreme quantile approach," Resources Policy, Elsevier, vol. 62(C), pages 588-601.
    6. Chang, Chia-Lin & McAleer, Michael & Wang, Yu-Ann, 2018. "Modelling volatility spillovers for bio-ethanol, sugarcane and corn spot and futures prices," Renewable and Sustainable Energy Reviews, Elsevier, vol. 81(P1), pages 1002-1018.
    7. 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.
    8. Zhuo Chen & Bo Yan & Hanwen Kang & Liyu Liu, 2023. "Asymmetric price adjustment and price discovery in spot and futures markets of agricultural commodities," Review of Economic Design, Springer;Society for Economic Design, vol. 27(1), pages 139-162, February.
    9. 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.
    10. 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.
    11. Zhige Wu & Alex Maynard & Alfons Weersink & Getu Hailu, 2018. "Asymmetric spot‐futures price adjustments in grain markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(12), pages 1549-1564, December.
    12. Serra, Teresa & Zilberman, David, 2013. "Biofuel-related price transmission literature: A review," Energy Economics, Elsevier, vol. 37(C), pages 141-151.
    13. Wixson, Sarah E. & Katchova, Ani L., 2012. "Price Asymmetric Relationships in Commodity and Energy Markets," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122553, European Association of Agricultural Economists.
    14. Spencer, Simon & Bredin, Don & Conlon, Thomas, 2018. "Energy and agricultural commodities revealed through hedging characteristics: Evidence from developing and mature markets," Journal of Commodity Markets, Elsevier, vol. 9(C), pages 1-20.

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    More about this item

    Keywords

    Long-run and short-run asymmetric adjustments; agricultural products; arbitrage opportunities; ethanol; hedging; widening and narrowing adjustment;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness

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