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The Dynamics of Energy-Grain Prices with Open Interest

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  • Shawkat Hammoudeh

    (Lebow College of Business Drexel University)

  • Soodabeh Sarafrazi

    (Lebow College of Business Drexel University)

  • Chia-Lin Chang

    (Department of Applied Economics Department of Finance National Chung Hsing University Taichung)

  • Michael McAleer

    (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, Complutense University of Madrid, and Institute of Economic Research, Kyoto University)

Abstract

This paper examines the short- and long-run daily relationships for a grain-energy nexus that includes the prices of corn, crude oil, ethanol, gasoline, soybeans, and sugar, and their open interest. The empirical results demonstrate the presence of these relationships in this nexus, and underscore the importance of ethanol and soybeans in all these relationships. In particular, ethanol and be considered as a catalyst in this nexus because of its significance as a loading factor, a long-run error corrector and a short-run adjuster. Ethanol leads all commodities in the price discovery process in the long run. The negative cross-price open interest effects suggest that there is a money outflow from all commodities in response to increases in open interest positions in the corn futures markets, indicating that active arbitrage activity takes place in those markets. On the other hand, an increase in the soybean open interest contributes to fund inflows in the corn futures market and the other futures markets, leading to more speculative activities in these markets. In connection with open interest, the ethanol market fails because of its thin market. Finally, it is interesting to note that the long-run equilibrium (cointegrating relationship), speeds of adjustment and open interest across markets have strengthened significantly during the 2009-2011 economic recovery period, compared with the full and 2007-2009 Great Recession periods.

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Bibliographic Info

Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 776.

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Date of creation: May 2011
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Handle: RePEc:kyo:wpaper:776

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Keywords: Energy-grain price nexus; open interest; futures prices; crude oil; gasoline; corn; soybean; suger; arbitrage; speculation.;

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  1. Kelvin Balcombe & George Rapsomanikis, 2008. "Bayesian Estimation and Selection of Nonlinear Vector Error Correction Models: The Case of the Sugar-Ethanol-Oil Nexus in Brazil," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(3), pages 658-668.
  2. Dahlgran, Roger A., 2009. "Inventory and Transformation Hedging Effectiveness in Corn Crushing," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 34(1), April.
  3. Tokgoz, Simla & Elobeid, Amani & Fabiosa, Jacinto F. & Hayes, Dermot J. & Babcock, Bruce A. & Yu, Tun-Hsiang & Dong, Fengxia & Hart, Chad E., 2008. "Bottlenecks, Drought, and Oil Price Spikes: Impact on U.S. Ethanol and Agricultural Sectors," Staff General Research Papers 12935, Iowa State University, Department of Economics.
  4. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  5. Gohin, Alexandre & Treguer, David, 2010. "On the (De)Stabilization Effects of Biofuels: Relative Contributions of Policy Instruments and Market Forces," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 35(1), April.
  6. Franken, Jason R.V. & Parcell, Joseph L., 2003. "Cash Ethanol Cross-Hedging Opportunities," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 35(03), December.
  7. Wallace E. Tyner, 2010. "The integration of energy and agricultural markets," Agricultural Economics, International Association of Agricultural Economists, vol. 41(s1), pages 193-201, November.
  8. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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