An empirical analysis of the dynamic interactions among ethanol, crude oil and corn prices in the US market
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An empirical analysis of the dynamic interactions among ethanol, crude oil and corn prices in the US market Dimitrios Dimitriadis1
· Constantinos Katrakilidis1
© Springer Science+Business Media, LLC, part of Springer Nature 2018
Abstract This paper studies the dynamic interactions of the ethanol, crude oil and corn market prices in the United States from January 2005 up to December 2014. The empirical analysis, for the shake of robustness, employs alternative time series methodologies based on single equation and system estimation approaches to cointegration and more specifically, the autoregressive distributed lags and the Johansen ML cointegration methodologies were applied complementary. The findings reveal a statistically significant long-run causal effect running from crude oil and corn prices to ethanol price as well as from ethanol and corn prices to crude oil price. Additionally, a positive relationship between crude oil price and ethanol price was revealed. Keywords Ethanol · Agricultural commodities · Crude oil · Corn · Cointegration · Causality
1 Introduction In recent years, the prices of agricultural products and especially that of corn have exhibited a significant variability. The percentage price increases for grains have reached their maximum level from 2006 through mid-2008 (Sumner 2009). In summer 2008 prices fell sharply but quickly came over to previous levels (Wright 2011). Over the same period the price of crude oil also fluctuates greatly, having reached its all-time maximum of $150 per barrel in 2008. Since 2014, there is a downward trend, partly due to the increased production of shale oil in the United States of America (USA). The evolution of corn price (CRN) is presented in Fig. 1. Many researchers offer various possible reasons for the fluctuations of agricultural products prices (Irwin and Good 2009; Wright 2011). However, the crucial point to understand the price variability is its relationship with energy and the fact that agricultural markets are
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Dimitrios Dimitriadis [email protected] Aristotle University of Thessaloniki, Thessaloniki, Greece
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Ann Oper Res
CRN
2005M1 2005M7 2006M1 2006M7 2007M1 2007M7 2008M1 2008M7 2009M1 2009M7 2010M1 2010M7 2011M1 2011M7 2012M1 2012M7 2013M1 2013M7 2014M1 2014M7
10 8 6 4 2 0
Fig. 1 Graph of corn prices from January 2005 to December 2014
affected by policies focusing at increasing ethanol production (Muhammad and Kebede 2009; Hertel and Beckman 2011). To cope with the oil crisis of the 1970s, several governments focused on increasing biofuel production as a viable alternative solution within the general context of energy security for their domestic markets. The reduction in fossil fuel prices, the tackling of greenhouse effect and the economic development in rural areas are some more benefits from the increase of biofuel production (Hochman et al. 2010). As a result, during the first two decades of the new millennium the production of biofuels grows worldwide at an impressive rate. Amongst biofuels, bioethanol and biodiesel
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