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Asymmetric Adjustments in the Ethanol and Grains Markets

  • Chia-Lin Chang


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

  • Li-Hsueh Chen

    (California State University-Los Angeles, Los Angeles, California.)

  • Shawkat Hammoudeh

    (Department of Economics, Drexel University Philadelphia, PA)

  • Michael McAleer

    (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute, The Netherlands, Department of Quantitative Economics, Complutense University of Madrid, and Institute of Economic Research, Kyoto University.)

This paper examines the long- and short-run asymmetric adjustments and pairs trades 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 occur 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 the 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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Paper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico in its series Documentos de Trabajo del ICAE with number 2012-11.

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Length: 34 pages
Date of creation: 2012
Date of revision: Apr 2012
Handle: RePEc:ucm:doicae:1211
Note: The authors wish to thank two referees for helpful comments and suggestions. The first author wishes to acknowledge the financial support of the National Science Council, Taiwan. The fourth author is most grateful for the financial support of the Australian Research Council, National Science Council, Taiwan, and the Japan Society for the Promotion of Science. Corresponding author:
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  4. Chang, C-L. & McAleer, M.J. & Maasoumi, E., 2012. "Robust Ranking of Journal Quality: An Application to Economics," Econometric Institute Research Papers EI 2012-05, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
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