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On the drivers of commodity co-movement: Evidence from biofuels

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  • Francisco Peñaranda
  • Augusto Rupérez-Micola

Abstract

We use the recent introduction of biofuels to study the effect of industry factors on the relationships between wholesale commodity prices. Correlations between agricultural products and oil are strongest in the 2005-09 period, coinciding with the boom of biofuels, and remain substantial until 2011. We disentangle three possible drivers for the linkage: substitution, energy costs, and financialization. The timing and magnitude of the biofuels-to-oil relationships are different to those of other commodities, and far higher than can be justified by costs and financialization. Substitution and costs drive the monthly correlations of long-term futures, and each of the three contribute equally to the daily co-movement of the short-term ones. The findings survive many robustness checks and appear in the stock market.

Suggested Citation

  • Francisco Peñaranda & Augusto Rupérez-Micola, 2009. "On the drivers of commodity co-movement: Evidence from biofuels," Economics Working Papers 1174, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2011.
    • Handle: RePEc:upf:upfgen:1174
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    References listed on IDEAS

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    Cited by:

    1. Ing-Haw Cheng & Wei Xiong, 2014. "Financialization of Commodity Markets," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 419-441, December.

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    More about this item

    Keywords

    biofuels; commodities; co-movement; ethanol; oil; structural breaks;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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