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Asymmetric Adjustments in the Ethanol and Grains Markets

  • Chia-Lin Chang

    (National Chung Hsing University)

  • Li-Hsueh Chen

    (California State University-Los Angeles)

  • Shawkat Hammoudeh

    (Drexel University)

  • Michael McAleer

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

This paper examines the long- and short-run asymmetric adjustments 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 happen 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 exception of the corn own pair underscore the importance of futures prices in the price discovery and hedging potential, particularly for ethanol futures.

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File URL: http://www.kier.kyoto-u.ac.jp/DP/DP752.pdf
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Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 752.

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Length: 39pages
Date of creation: Dec 2010
Date of revision:
Handle: RePEc:kyo:wpaper:752
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