Causality Between Market Liquidity and Depth for Energy and Grains

Thumbnail Image
Official URL
Full text at PDC
Publication Date
Advisors (or tutors)
Journal Title
Journal ISSN
Volume Title
Instituto Complutense de Análisis Económico. Universidad Complutense de Madrid
Google Scholar
Research Projects
Organizational Units
Journal Issue
This paper examines the roles of futures prices of crude oil, gasoline, ethanol, corn, soybeans and sugar in the energy-grain nexus. It also investigates the own- and cross-market impacts for lagged grain trading volume and open interest in the energy and grain markets. According to the results, the conventional view, for which the impacts are from oil to gasoline to ethanol to grains in the energy-grain nexus, does not hold well in the long run because the oil price is influenced by gasoline, soybeans and oil. Moreover, gasoline is preceded by only the oil price and ethanol is not foreshadowed by any of the prices. However, in the short run, two-way feedback in both directions exists in all markets. The grain trading volume effect across oil and gasoline is more pronounced in the short run than the long run, satisfying both the overconfidence/disposition and new information hypotheses across markets. The results for the ethanol open interest shows that money flows out of this market in both the short and long run, but no results suggest across market inflows or outflows to the other grain markets.
For financial support, the third author wishes to thank the National Science Council, Taiwan, and the fourth author wishes to thank the Australian Research Council, National Science Council, Taiwan, and the Japan Society for the Promotion of Science.
Unesco subjects
Admati, A.R. and Pfleiderer, P. (1988). A theory of intraday patterns: Volume and price variability. Review of Financial Studies 1, 3-40. Baffes, J. and Haniotis, T. (2010). Placing the 2006/08 commodity price boom into perspective. Policy Research Working Paper 5371, World Bank. Dahlgran, R.A. (2009). Inventory and transformation hedging effectiveness in corn crushing. Journal of Agricultural and Resource Economics 34, 154-171. Dahlgran, R.A. (2010). Ethanol futures: Thin but effective? Why? Proceedings of the NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting and Market Risk Management. Saint Louis, Missouri. Franken, J.R.V. and Parcell, J.L. (2003) Cash ethanol cross-hedging opportunities. Journal of Agricultural and Applied Economics 35, 509-516. Garbade, K. and Silber, W.L. (1982). Price movements and price discovery in futures and cash markets. Review of Economics and Statistics 64, 289-297. Ghatak S. and Siddiki, J. (2001). The use of ARDL approach in estimating virtual exchange rates in India. Journal of Applied Statistics, 28: 573-583. Gohin A and Treguer D. (2010). On the (De)Stabilization Effects of Biofuels: Relative Contributions of Policy Instruments and Market Forces. Journal of Agricultural and Resource Economics 35, 72-86. Kyle. A. S .(1985). Continuous auctions and insider trading. Econometrica 53 (6), 1315-1335. Laurenceson, J. and Chai, J.C. H. (2003). Financial Reform and Economic Development in China, Cheltenham, UK, Edward Elgar. Lin, W. and Riley, P.A. (1998). Rethinking the soybeans-to-corn price ratio. Is it still a good indicator for planting decisions? Economic Research Service, US Department of Agriculture, Washington, D,C., April, 1-33. Mattos, F. and Garica, P. (2004). Price discovery in thinly traded markets: Cash and futures relationships in Brazilian agricultural futures markets. Proceedings of the NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting and Market Risk Management. Saint Lois, Missouri. Pesaran, M.H. and Pesaran, B. (1997). Working with Microfit 4.0. Cambridge: Camfit Data Ltd. Pesaran, M.H., Shin, Y. and Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships, Journal of Applied Econometrics, 16, 289-326. Stock, J.H. and Watson, M.W. (2003). Introduction to Econometrics, Boston: Addison Wesley, page 460. Tokgoz, S., Elobeid, A. Fabiose, J., Hayes, D.J., Babcock, B.A., Yu, T.H. and Dong, F.X. (2008). Bottlenecks, drought, and oil price spikes: Impact on U.S ethanol and agricultural sectors. Review of Agricultural Economics 30, 604-622. Tyner, W.E. (2008). The US ethanol and biofuels boom: its origin, current status and future prospect. BioScience 58, 646-653. Tyner, W.E. (2010). The integration of energy and gricultural markets. Agricultural Economics 41, 193-201. Wang, H.H. and Ke, B. (2002). Efficiency test of agricultural commodity futures markets in China.” Washington State University. Yang, J., Bessler, D.A. and Leathan, D. (2001). Asset storability and price discovery in commodity futures market: A new look. Journal of Futures Markets 21, 279-300. Zapato, H.O., Fortenberry, T.R. and Armstrong, D. (2003). Price discovery in the futures and cash market for sugar. Paper presented at the Southern Agricultural Economics Association Annual Meeting, Mobile, Alabama, February, 1-5. Zapato, H.O., Fortenberry, T.R. and Armstrong, D. (2005). Price discovery in the world sugar futures and cash markets: Implications for the Dominican Republic. Staff Paper #469, University of Wisconsin, Madison, Wisconsin.