Asymmetric Adjustments in the Ethanol and Grains Markets

39 Pages Posted: 21 Dec 2010

See all articles by Chia-Lin Chang

Chia-Lin Chang

National Chung Hsing University - Department of Applied Economics, Department of Finance

Li-Hsueh Chen

California State University, Los Angeles - College of Business & Economics

Shawkat M. Hammoudeh

Montpellier Business School; Drexel University - Lebow College of Business

Michael McAleer

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute; Tinbergen Institute; University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

Date Written: December 21, 2010

Abstract

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.

Suggested Citation

Chang, Chia-Lin and Chen, Li-Hsueh and Hammoudeh, Shawkat M. and McAleer, Michael, Asymmetric Adjustments in the Ethanol and Grains Markets (December 21, 2010). Available at SSRN: https://ssrn.com/abstract=1729126 or http://dx.doi.org/10.2139/ssrn.1729126

Chia-Lin Chang (Contact Author)

National Chung Hsing University - Department of Applied Economics, Department of Finance ( email )

Taichung, Taiwan
China

Li-Hsueh Chen

California State University, Los Angeles - College of Business & Economics ( email )

United States

Shawkat M. Hammoudeh

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, 34080
France

Drexel University - Lebow College of Business ( email )

3141 Chestnut Street
Philadelphia, PA 19104
United States
2158956673 (Phone)
2158956975 (Fax)

HOME PAGE: http://faculty.lebow.drexel.edu/HammoudehS/

Michael McAleer

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute ( email )

Rotterdam
Netherlands

Tinbergen Institute

Rotterdam
Netherlands

University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

Tokyo
Japan

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