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Modelling Volatility Spillovers on Bio-ethanol and Related Agricultural Commodity Spot and Future Returns
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The interest in biofuel has raised concerns about its impact on the prices, returns and volatility of related agricultural commodities. Analyzing the spillover effects on agricultural commodities and biofuel helps commodity suppliers hedge their portfolios and manage the risk and co-risk of their biofuel and agricultural commodities. In the past, there have been many papers concerned with analyzing crude oil and agricultural commodities separately. The purpose of this dissertation is to examine the volatility spillovers for spot and futures returns on bio-ethanol and related agricultural commodities, specifically corn and sugarcane, using the multivariate conditional volatility diagonal BEKK model. The daily data used is from 31 October 2005 to 14 January 2015. The empirical results show that in 2 of 6 cases in spot markets, there were significant negative co-volatility spillover effects, specifically corn on subsequent sugarcane co-volatility with corn, and sugarcane on subsequent corn co-volatility with sugarcane. In the other 4 cases, there were no significant co-volatility spillover effects. There are significant positive co-volatility spillover effects in all 6 cases in future markets, namely between corn and sugarcane, corn and ethanol, and sugarcane and ethanol. It is clear that futures prices of bio-ethanol and the two agricultural commodities, corn and sugarcane, have stronger co-volatility spillovers than their spot price counterparts. These results suggest that the bio-ethanol and agricultural commodities should be considered as viable futures products in financial portfolios for risk management.
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