Chang, Chia-Lin and Chen, Li-Hsueh and Hammoudeh, Shawkat and McAleer, Michael (2012) Asymmetric Adjustments in the Ethanol and Grains Markets. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 11, 2012, ] (Unpublished)
Available under License Creative Commons Attribution Non-commercial.
Official URL: http://eprints.ucm.es/15095/
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|
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)|
Baffes, J. and Haniotis, T. (2010). “Placing the 2006/08 commodity price boom into perspective”. Policy Research Working Paper 5371, World Bank. http://www-wds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2010/07/21/000158349_20100721110120/Rendered/PDF/WPS5371.pdf.
Balke, N. and Fomby, T. (1997). Threshold cointegration. International Economic Review 38, 627-643.
Chan, K. (1993). “Consistency and limiting distribution of the least squares estimator of a threshold autoregressive model.” Annals of Statistics 21, 520-533.
Dahlgran, R.A. (2009). “Inventory and transformation hedging effectiveness in corn crushing.” Journal of Agricultural and Resource Economics 34, 154-171.
Enders, W. and Granger, C. (1998). “Unit-root tests and asymmetric adjustment with an example using the term structure of interest rates.” Journal of Business and Economic Statistics. 16, 304-311.
Enders, W. and Siklos, P.L. (2001). “Cointegration and threshold adjustment.” Journal of Business and Economic Statistics 19, 166-176.
Engle, R. and Granger, C. (1987). “Cointegration and error-correction representation, estimation and testing.” Econometrica 55, 251-276.
Franken, J.R.V. and Parcell, J.L. (2003) “Cash ethanol cross-hedging opportunities.” Journal of Agricultural and Applied Economics 35, 509-516.
Garbade, K. and Silber, W.L. (1982). “Price movements and price discovery in futures and cash markets.” Review of Economics and Statistics 64, 289-297.
Hammoudeh, S., Chen, L.-H. and Fattouh, B. (2010). “Asymmetric adjustments in oil and metals markets.” Energy Journal 31, 183-203.
Hammoudeh, S., Sarafrazi, S., Chang, C.-L. and McAleer, M. (2012). “The dynamics of energy-grain prices with open interest.” Unpublished paper, Drexel University, Philadelphia, PA.
Hansen, B. (1997). “Inference in TAR models.” Studies in Nonlinear Dynamics and Econometrics 1, 119-131.
Hansen, B.E. and Seo, B. (2002). “Testing for two regime threshold cointegration in vector-correction models.” Journal of Econometrics 110, 293-318.
Johansen, S. (1988). Statistical analysis of cointegrating vectors. Journal of Economic Dynamics and Control 12, 231-254.
Johansen, S. and Juselius, K. (1990). Maximum likelihood estimation and inferences on cointegration-with application to demand for money. Oxford Bulletin of Economics and Statistics 52, 169-210.
Lin, W. and Riley, P.A. (1998). Rethinking the soybeans-to-corn price ratio. Is it still a good indicator for planting decisions?”, Economic Research Service, US Department of Agriculture, Washington, D,C., April, 1-33. http://www.ers.usda.gov/publications/corn/crnprato.pdf .
Mattos, F. and Garica, P. (2004). “Price discovery in thinly traded markets: Cash and futures relationships in Brazilian agricultural futures markets.” Proceedings of the NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting and Market Risk Management. Lois, Missouri. http://ageconsearch.umn.edu/bitstream/19019/1/cp04ma02.pdf.
Sari, R., Hammoudeh, S., Chang, C.-L. and McAleer, M. (2012). “Causality between Market liquidity and depth for energy and grains.” To appear in Energy Economics. http://dx.doi.org/10.1016/j.eneco.2012.02.006 .
Wang, H.H. and Ke, B. (2002). Efficiency test of agricultural commodity futures markets in China.” Washington State University. http://www.bm.ust.hk/~ced/Holly%20H%20WANG.pdf .
Yang, J., Bessler, D.A. and Leathan, D. (2001). “Asset storability and price discovery in commodity futures market: A new look”. Journal of Futures Markets 21, 279-300.
Zapato, H.O., Fortenberry, T. R. and Armstrong, D. (2003). “Price discovery in the futures and cash market for sugar.” Paper presented at the Southern Agricultural Economics Association Annual Meeting, Mobile, Alabama, February, 1-5.
Zapato, H.O., Fortenberry, T.R. and Armstrong, D. (2005). “Price discovery in the world sugar futures and cash markets: Implications for the Dominican Republic.” Staff Paper # 469, University of Wisconsin, Madison, Wisconsin. Http://www.aae.wisc.edu/pubs/sps/pdf/stpap469.pdf .
|Deposited On:||04 May 2012 08:50|
|Last Modified:||06 Feb 2014 10:16|
Repository Staff Only: item control page