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On the drivers of commodity co-movement: Evidence from biofuels

  • Francisco Peñaranda
  • Augusto Rupérez-Micola

We use the recent introduction of biofuels to study the effect of industry factors on the relationships between wholesale commodity prices. Correlations between agricultural products and oil are strongest in the 2005-09 period, coinciding with the boom of biofuels, and remain substantial until 2011. We disentangle three possible drivers for the linkage: substitution, energy costs, and financialization. The timing and magnitude of the biofuels-to-oil relationships are different to those of other commodities, and far higher than can be justified by costs and financialization. Substitution and costs drive the monthly correlations of long-term futures, and each of the three contribute equally to the daily co-movement of the short-term ones. The findings survive many robustness checks and appear in the stock market.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1174.

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Date of creation: Oct 2009
Date of revision: Oct 2011
Handle: RePEc:upf:upfgen:1174
Contact details of provider: Web page: http://www.econ.upf.edu/

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  10. Martin Banse & Hans van Meijl & Andrzej Tabeau & Geert Woltjer, 2008. "Will EU biofuel policies affect global agricultural markets?," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 35(2), pages 117-141, June.
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