Volatility spillover effects and cross hedging in corn and crude oil futures

Abstract

Using a volatility spillover model, we find evidence of significant spillovers from crude oil prices to corn cash and futures prices, and that these spillover effects are time‐varying. Results reveal that corn markets have become much more connected to crude oil markets after the introduction of the Energy Policy Act of 2005. Furthermore, when the ethanol–gasoline consumption ratio exceeds a critical level, crude oil prices transmit positive volatility spillovers into corn prices and movements in corn prices are more energy‐driven. Based on this strong volatility link between crude oil and corn prices, a new cross‐hedging strategy for managing corn price risk using oil futures is examined and its performance is studied. Results show that this cross‐hedging strategy provides only slightly better hedging performance compared with traditional hedging in corn futures markets alone. The implication is that hedging corn price risk in corn futures markets alone can still provide relatively satisfactory performance in the biofuel era. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark

Commodity markets volatility transmission: Roles of risk perceptions and uncertainty in financial markets

“…In a detail, the wheat returns are not driven by crude oil until June 2010 but the financial crisis of 2008-09 provides a stronger positive relationship between crude oil and wheat markets. The significant volatility spillover from the crude oil to corn markets is in line with the previous studies of Harri andHudson (2009), Trujillo-Barrera et al (2012), and Wu et al (2011). In addition, the volatility transmission mechanism seems not to be broken out due to the global financial crisis in 2008.…”

“…According to Hertel and Beckman (2012), the dynamics behind the ethanol market, crude oil, and corn markets leads to the linkage among the three markets that did not exist before 2006, and the correlation of crude oil and corn markets from September 2007 to October 2008 is 0.92. In parallel, there are also several empirical findings suggesting significant price volatility spillovers from crude oil to the corn markets, and their explanations are based on biofuel production (Serra, 2013;Wu et al, 2011) 2 . On contrary, for example, Natalenov et al (2011) indicate that biofuel production is not the main reason for the co-movement between the oil and agricultural commodity markets.…”

“…The interaction between energy and agriculture commodity markets has attracted growing interest in the literature, and several papers focus on "direct" price volatility spillover mechanism among oil and agricultural commodity markets (e.g., Alghalith, 2010;Chang and Su, 2010;Haixia and Shiping, 2013;Harri and Hudson, 2009;Nazlioglu et al, 2013;Serra, 2011;Trujillo-Barrera et al, 2012;Wu et al, 2011). For example, Harri and Hudson (2009) analyze volatility transmission among the crude oil, soybeans, and corn markets for the period They find that there is a unidirectional spillover effect from the crude oil to the corn and fuel ethanol markets, and bi-directional spillovers between the corn and the fuel ethanol markets.…”

The Influence of Biofuels, Economic and Financial Factors on Daily Returns of Commodity Futures Prices

“…They further found no long-run relationships between energy and agricultural price levels. Conversely, the studies by Harri and Darren (2009), Du et al (2011) and Wu and al. (2011) revealed a linkage between oil price and corn price after the introduction of the Energy Policy Act in the U.S. in 2005.…”

Volatility and Risk Management in European Electricity Futures Markets

“…This literature has examined equities (Park andSwitzer, 1995, Cotter andHanly, 2006), various commodities Yang, 2008, Wu, Guan, andMyers, 2011), foreign exchange (Brooks and Chong, 2001) portfolio products such as exchange traded funds (Alexander and Barbosa, 2008) and of course Energy commodities such as Crude…”