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Inside the Black Box: Price Linkage and Transmission Between Energy and Agricultural Markets

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  • Du, Xiaodong
  • McPhail, Lihong Lu

Abstract

This study addresses the complex relationship between energy and agricultural markets—represented by corn, ethanol, and gasoline prices—particularly in light of the growth in biofuel production. Contemporaneous price response and transmission of market shocks are investigated in a simultaneous-equation system to disclose fundamental driving forces before and after the development of large-scale ethanol production. We use a dynamic conditional correlation multivariate GARCH model to demonstrate a strengthening relationship among corn, ethanol, and gasoline prices. We identify a structural change point at March 25, 2008 using the test by Bai and Perron (2003). The strengthened market relationship is further illustrated by variance decomposition based on a structural VAR model.

Suggested Citation

  • Du, Xiaodong & McPhail, Lihong Lu, 2011. "Inside the Black Box: Price Linkage and Transmission Between Energy and Agricultural Markets," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 103268, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea11:103268
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    File URL: http://purl.umn.edu/103268
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    References listed on IDEAS

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    1. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
    2. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
    3. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    corn; ethanol; gasoline; structural break; Structural VAR; GARCH; Agricultural and Food Policy; Demand and Price Analysis; Research Methods/ Statistical Methods; Resource /Energy Economics and Policy; C32; Q11; Q4;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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