Volatility spillovers between ethanol and corn prices: A Bayesian analysis

Abstract

The relationship between corn and ethanol markets has become a popular topic and has been investigated in various studies. However, examining the co-volatility spillover between corn and ethanol markets remains neglected in the literature. This paper aims to fill this gap by analyzing the co-volatility spillover between corn and ethanol markets in the world's largest ethanol producers and consumers, including the United States, Brazil, and China. To achieve this purpose, we utilize the Bayesian BEKK-GARCH(1,1) model to estimate the degree of co-volatility of corn and ethanol returns. Our empirical results indicate a significant bidirectional volatility spillover between corn and ethanol in all countries. We also find that the co-volatility between corn and ethanol returns is not stable and fluctuates over time, particularly in 2016 and 2020, which correspond to the 2010s oil glut and the COVID-19 pandemic, respectively.