Paper #1174

Title:

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

Authors:

Francisco Peñaranda and Augusto Rupérez-Micola

Date:

October 2009 (Revised: October 2011)

Abstract:

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.

Keywords:

biofuels, commodities, co-movement, ethanol, oil, structural breaks

JEL codes:

G15, Q18, O13

Area of Research:

Finance and Accounting / Macroeconomics and International Economics / Statistics, Econometrics and Quantitative Methods

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