Fossil Fuel Price Uncertainty and Feedstock Edible Oil Prices: Evidence from MGARCH-M and VIRF Analysis

41 Pages Posted: 6 May 2016

See all articles by Akram Hasanov

Akram Hasanov

Monash University - Department of Econometrics & Business Statistics

Hung Xuan Do

Massey University, Albany campus; University of Technology, Sydney

Mohammed Sharaf Shaiban

Monash Business School

Date Written: Feb 25, 2016

Abstract

This paper focuses on examining the impact of crude oil price volatility on the price changes of major edible oils (rapeseed, soybean, and sunflower), which are the main feedstock for the biodiesel industry in the European Union. For this purpose, a four-variate version of non-diagonal GARCH-in-mean model that allows for asymmetry in the variance-covariance matrix is used. An important conclusion that emerges from this study is that the crude oil price uncertainty appears to be responsible for a significant decline in price returns of major feedstock edible oils considered in this study. The volatility impulse response analyses support the conclusion that the conditional variances of both edible and crude oil and covariances between them are generally highly responsive to historical shock. However, the size of the impacts is mainly commodity specific. Finally, we investigate the causality from crude oil price volatility to edible oil prices and the effects of oil price shocks on edible oil prices by using the Granger causality test and generalized impulse response function analysis, respectively. The empirical results show that there is strong evidence of causality from crude oil price volatility to all edible oil prices under study, and generalized impulse response analysis shows that the edible oil markets significantly respond to the shocks in oil prices.

Keywords: Oil/food price uncertainty, crude oil, edible oil, Multivariate GARCH, VIRF

JEL Classification: C32, Q18, Q42

Suggested Citation

Hasanov, Akram and Do, Hung Xuan and Shaiban, Mohammed Sharaf, Fossil Fuel Price Uncertainty and Feedstock Edible Oil Prices: Evidence from MGARCH-M and VIRF Analysis (Feb 25, 2016). Energy Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2775492

Akram Hasanov

Monash University - Department of Econometrics & Business Statistics ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Hung Xuan Do (Contact Author)

Massey University, Albany campus ( email )

Auckland
New Zealand
+64 92136160 (Phone)
+64 92136160 (Fax)

HOME PAGE: http://www.massey.ac.nz/massey/expertise/profile.cfm?stref=972450

University of Technology, Sydney ( email )

PO Box 123
Broadway, 2007
Australia

Mohammed Sharaf Shaiban

Monash Business School ( email )

Wellington Road
Clayton, Victoria 3168
Australia

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