IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Speculation and volatility spillover in the crude oil and agricultural commodity markets: A Bayesian analysis

  • Du, Xiaodong
  • Yu, Cindy L.
  • Hayes, Dermot J.

This paper assesses factors that potentially influence the volatility of crude oil prices and the possible linkage between this volatility and agricultural commodity markets. Stochastic volatility models are applied to weekly crude oil, corn, and wheat futures prices from November 1998 to January 2009. Model parameters are estimated using Bayesian Markov Chain Monte Carlo methods. Speculation, scalping, and petroleum inventories are found to be important in explaining the volatility of crude oil prices. Several properties of crude oil price dynamics are established, including mean-reversion, an asymmetry between returns and volatility, volatility clustering, and infrequent compound jumps. We find evidence of volatility spillover among crude oil, corn, and wheat markets after the fall of 2006. This can be largely explained by tightened interdependence between crude oil and these commodity markets induced by ethanol production.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/B6V7G-51Y57P9-1/2/006513d2cef8837159f86bf5dbca4f99
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 33 (2011)
Issue (Month): 3 (May)
Pages: 497-503

as
in new window

Handle: RePEc:eee:eneeco:v:33:y:2011:i:3:p:497-503
Contact details of provider: Web page: http://www.elsevier.com/locate/eneco

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  2. Darrell Duffie & Jun Pan & Kenneth Singleton, 1999. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," NBER Working Papers 7105, National Bureau of Economic Research, Inc.
  3. Kaufmann, Robert K. & Ullman, Ben, 2009. "Oil prices, speculation, and fundamentals: Interpreting causal relations among spot and futures prices," Energy Economics, Elsevier, vol. 31(4), pages 550-558, July.
  4. Working, Holbrook, 1960. "Speculation on Hedging Markets," Food Research Institute Studies, Stanford University, Food Research Institute, issue 02, May.
  5. James D. Hamilton, 2009. "Understanding Crude Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 179-206.
  6. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
  7. Robert F. Engle & Victor K. Ng, 1991. "Measuring and Testing the Impact of News on Volatility," NBER Working Papers 3681, National Bureau of Economic Research, Inc.
  8. Shephard, Neil (ed.), 2005. "Stochastic Volatility: Selected Readings," OUP Catalogue, Oxford University Press, number 9780199257201, March.
  9. Wirl, Franz, 2008. "Why do oil prices jump (or fall)?," Energy Policy, Elsevier, vol. 36(3), pages 1029-1043, March.
  10. Fama, Eugene F & French, Kenneth R, 1987. "Commodity Futures Prices: Some Evidence on Forecast Power, Premiums,and the Theory of Storage," The Journal of Business, University of Chicago Press, vol. 60(1), pages 55-73, January.
  11. Uri, Noel D., 1996. "Changing crude oil price effects on US agricultural employment," Energy Economics, Elsevier, vol. 18(3), pages 185-202, July.
  12. Jushan Bai, 1997. "Estimation Of A Change Point In Multiple Regression Models," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 551-563, November.
  13. Sangjoon Kim & Neil Shephard, 1994. "Stochastic volatility: likelihood inference and comparison with ARCH models," Economics Papers 3., Economics Group, Nuffield College, University of Oxford.
  14. Geman, Hélyette & Ohana, Steve, 2009. "Forward curves, scarcity and price volatility in oil and natural gas markets," Energy Economics, Elsevier, vol. 31(4), pages 576-585, July.
  15. Neil Shephard & Siddhartha Chib, 1999. "Analysis of High Dimensional Multivariate Stochastic Volatility Models," Economics Series Working Papers 1999-W18, University of Oxford, Department of Economics.
  16. Sadorsky, Perry, 2006. "Modeling and forecasting petroleum futures volatility," Energy Economics, Elsevier, vol. 28(4), pages 467-488, July.
  17. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
  18. Chib, Siddhartha & Nardari, Federico & Shephard, Neil, 2002. "Markov chain Monte Carlo methods for stochastic volatility models," Journal of Econometrics, Elsevier, vol. 108(2), pages 281-316, June.
  19. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
  20. Ewing, Bradley T. & Malik, Farooq & Ozfidan, Ozkan, 2002. "Volatility transmission in the oil and natural gas markets," Energy Economics, Elsevier, vol. 24(6), pages 525-538, November.
  21. Ronald A. Babula & Agapi Somwaru, 1992. "Dynamic impacts of a shock in crude oil price on agricultural chemical and fertilizer prices," Agribusiness, John Wiley & Sons, Ltd., vol. 8(3), pages 243-252.
  22. Baele, Lieven, 2005. "Volatility Spillover Effects in European Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(02), pages 373-401, June.
  23. Irwin, Scott H. & Good, Darrel L., 2009. "Market Instability in a New Era of Corn, Soybean, and Wheat Prices," Choices, Agricultural and Applied Economics Association, vol. 24(1).
  24. Dwight R. Sanders & Scott H. Irwin & Robert P. Merrin, 2010. "The Adequacy of Speculation in Agricultural Futures Markets: Too Much of a Good Thing?," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 32(1), pages 77-94.
  25. B. Wade Brorsen, 1991. "Futures trading, transaction costs, and stock market volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 11(2), pages 153-163, 04.
  26. Cheong, Chin Wen, 2009. "Modeling and forecasting crude oil markets using ARCH-type models," Energy Policy, Elsevier, vol. 37(6), pages 2346-2355, June.
  27. Robert Engle, 2002. "New frontiers for arch models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 425-446.
  28. Morana, Claudio, 2001. "A semiparametric approach to short-term oil price forecasting," Energy Economics, Elsevier, vol. 23(3), pages 325-338, May.
  29. Hamao, Yasushi & Masulis, Ronald W & Ng, Victor, 1990. "Correlations in Price Changes and Volatility across International Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 281-307.
  30. Haitao Li & Martin T. Wells & Cindy L. Yu, 2008. "A Bayesian Analysis of Return Dynamics with Lévy Jumps," Review of Financial Studies, Society for Financial Studies, vol. 21(5), pages 2345-2378, September.
  31. Jacquier, Eric & Polson, Nicholas G. & Rossi, P.E.Peter E., 2004. "Bayesian analysis of stochastic volatility models with fat-tails and correlated errors," Journal of Econometrics, Elsevier, vol. 122(1), pages 185-212, September.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:33:y:2011:i:3:p:497-503. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.