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Asymmetric Adjustments in the Ethanol and Grains Markets

Chang, Chia-Lin and Chen, Li-Hsueh and Hammoudeh, Shawkat and McAleer, Michael (2012) Asymmetric Adjustments in the Ethanol and Grains Markets. [Working Paper or Technical Report] (Unpublished)

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Abstract

This paper examines the long- and short-run asymmetric adjustments and pairs trades 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 occur 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 the exception of the corn own pair, underscore the importance of futures prices in the price discovery and hedging potential, particularly for ethanol futures.

Item Type:Working Paper or Technical Report
Additional Information:JEL Classifications: E43, Q11, Q13.
Uncontrolled Keywords:Long run, Short run, Asymmetric adjustments, Ethanol, agricultural products, Arbitrage opportunities, Hedging, Widening and narrowing adjustment.
Subjects:Social sciences > Economics > Econometrics
Social sciences > Economics > Commerce
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2012
Number:11
ID Code:15095
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Deposited On:04 May 2012 08:50
Last Modified:06 Feb 2014 10:16

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