Events / 6th Annual Bioindustrial Meeting: November 22-25, 2015 / Conference Abstracts / Track 3: Growing the Bioeconomy / Volatility Spillovers Between Biofuel-Related Markets: Ethanol and Hardwood Pulp in Canada

Volatility Spillovers Between Biofuel-Related Markets: Ethanol and Hardwood Pulp in Canada

Feng Qiu and Marty K. Luckert.
Department of Resource Economics and Environmental Sociology, University of Alberta, Edmonton, Alberta, Canada.

Understanding price volatility in markets is fundamental to the financial analyses of investments, the balancing of investment portfolios, and for designing market stabilization policies. But changes in markets over time can change the way that volatility occurs and is transmitted between markets. As ethanol markets have grown in the United States, so have their interactions with other sectors, such as agriculture, given that both markets compete for corn. Within this context, recent results indicate that price volatility in corn markets spillover to cause volatility in ethanol markets. Though ethanol production in Canada is in early stages of development, prospects for cellulosic ethanol are emerging, with new technology that could make use of fast growing woody plantations. But such inputs, too, can be used to make multiple products and are currently being used to produce hardwood pulp. Therefore, there is the potential for volatility spillovers to occur between ethanol and hardwood pulp markets. Our objectives are to assess whether ethanol and hardwood pulp markets in Canada are related through spillover effects, and to characterize how volatility is being transmitted. We estimate a multi-variate VAR-BEKK GARCH model, together with a volatility impulse response analysis, to pursue these research questions. Results indicate that there are significant volatility spillover effects between ethanol and hardwood pulp prices returns. Generalized impulse response analysis indicates that a shock to ethanol markets largely disappears in hardwood pulp markets after approximately 5 months, despite the fact that the effect may persist for 15 months in ethanol markets. As cellulosic ethanol production increases, we expect these spillovers to increase, potentially creating the need for investors and policy makers to re-examine their strategies.