Elsevier

Energy Economics

Volume 124, August 2023, 106759
Energy Economics

Price connectedness in U.S. ethanol terminal markets

https://doi.org/10.1016/j.eneco.2023.106759Get rights and content

Highlights

  • The U.S. ethanol market is a tightly integrated and arbitraged market in spatial terms.

  • Ethanol price volatility spillovers in the U.S are correlated with market fundamentals, policy, and market concentration.

  • Increased concentration in the Chicago trading platform may result in inefficient prices spreading across the U.S.

  • Chicago generates the most innovations to other ethanol market prices.

  • Chicago receives the least amount of innovations from all other markets.

Abstract

This article shows, for the first time, the degree of price volatility connectedness across the major regional ethanol markets in the U.S. Connectedness measures are based on forecast error variance decompositions that inform which prices drive system dynamics. We pay special attention to volatility spillovers to and from Chicago, as it is equipped with one of the largest terminals in the U.S. and is widely regarded as the center of ethanol price discovery in the country. Ethanol prices in the Chicago terminal electronic trading platform are also suspected of being manipulated over the 2017‐2019 period. We use Diebold and Yilmaz (2012 and 2014) and a rolling window approach to study the dynamics of price volatility connectedness over time. Using daily data from 2013 to the beginning of 2021, we find that Chicago is the market that generates the most innovations to other market prices. In contrast, Chicago receives the least amount of innovations from all other markets, placing Chicago at the center of price dynamics. We find that price connectedness measures are correlated with market fundamentals, policy, and concentration in the Chicago terminal electronic trading platform, with the latter being associated to an increase in the relevance of Chicago as a central market.

Section snippets

JEL categories

Q02

Q11

C3

The U.S. ethanol market

In this section, we focus on two U.S. ethanol market characteristics that are key to understand information spillovers: the relevance of the Chicago terminal and the ethanol policies.

Methods

In this section we describe the methods used to derive the connectedness measures among the daily ethanol prices observed across the U.S. from January 2, 2013 to February 4, 2021 and shed light on its possible drivers.

We assess the degree of connectedness among ethanol spot prices at different U.S. terminals using the Diebold and Yilmaz, 2012, Diebold and Yilmaz, 2014 approach. Their method is based on the Moving Average (MA) representation of a VAR model representing an N-dimensional

Data and results

This section presents the research results in three subsections, the first being devoted to the data, the second to connectedness measures and the third to their possible drivers.

Conclusions

This article quantifies the connectedness between the domestic U.S. ethanol markets for the first time. Connectedness measures are based on forecast error variance decompositions that inform which prices drive market dynamics. We consider major ethanol markets in the country that cover the Midwest, where ethanol production is concentrated, and East, West and Gulf Coast markets. We pay special attention to spillovers to and from Chicago, as it is equipped with one of the largest terminals in the

Inclusion and diversity

One or more of the authors of this paper self-identifies as an underrepresented ethnic minority in science.

Credit author statement

Maria Gerveni: Conceptualization, Data curation, Formal analysis, Writing - original draft. Teresa Serra: Conceptualization, Funding acquisition, Supervision, Writing - review & editing. Scott H. Irwin: Funding acquisition, Writing - review & editing. Todd Hubbs: Writing - review & editing.

Declaration of Competing Interest

We have no known conflict of interest to disclose.

Acknowledgements

We thank the Editor and Referees for helpful comments and suggestions that have substantially improved this article. This research was funded by the USDA Cooperative Agreement Number 58-3000-0-0075 and the Office of Futures and Options Research (OFOR) at the University of Illinois Urbana-Champaign.

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  • Cited by (0)

    1

    Maria Gerveni is a PhD student at University of Illinois at Urbana-Champaign.

    2

    Teresa Serra is a Professor and the Hieronymus Distinguished Chair in Futures Markets at University of Illinois at Urbana-Champaign.

    3

    Scott H. Irwin is a Professor and the Laurence J. Norton Chair of Agricultural Marketing at University of Illinois at Urbana-Champaign.

    4

    Todd Hubbs is a Cross Commodity Analyst at Economic Research Service (USDA).

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