Time-Frequency Dynamics of Bio-Fuels-Food System
CAMA Working Paper 27/2013
20 Pages Posted: 8 Jun 2013
Date Written: May 31, 2013
For the first time, we apply the wavelet coherence methodology on biofuels (ethanol and biodiesel) and a wide range of related commodities (gasoline, diesel, crude oil, corn, wheat, soybeans, sugarcane and rapeseed oil). This way, we are able to investigate dynamics of correlations in time and across scales (frequencies) with a model-free approach. We show that correlations indeed vary in time and across frequencies. We find two highly correlated pairs which are strongly connected at low frequencies - ethanol with corn and biodiesel with German diesel - during almost the whole analyzed period (2003-2011). Structure of correlations remarkably changes during the food crisis - higher frequencies become important for both mentioned pairs. This implies that during stable periods, ethanol is correlated with corn and biodiesel is correlated with German diesel mainly at low frequencies so that they follow a common long-term trend. However, in the crisis periods, ethanol (biodiesel) is led by corn (German diesel) even at high frequencies (low scales), which implies that the biofuels prices react more rapidly to the changes in their producing factors.
Keywords: biofuels, prices, correlations, wavelet coherence
JEL Classification: C22, Q16, Q42
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