Inside the Black Box: Price Linkage and Transmission Between Energy and Agricultural Markets

Abstract

This study addresses the complex relationship between energy and agricultural markets—represented by corn, ethanol, and gasoline prices—particularly in light of the growth in biofuel production. Contemporaneous price response and transmission of market shocks are investigated in a simultaneous-equation system to disclose fundamental driving forces before and after the development of large-scale ethanol production. We use a dynamic conditional correlation multivariate GARCH model to demonstrate a strengthening relationship among corn, ethanol, and gasoline prices. We identify a structural change point at March 25, 2008 using the test by Bai and Perron (2003). The strengthened market relationship is further illustrated by variance decomposition based on a structural VAR model.corn, ethanol, gasoline, structural break, Structural VAR, GARCH, Agricultural and Food Policy, Demand and Price Analysis, Research Methods/ Statistical Methods, Resource /Energy Economics and Policy, C32, Q11, Q4,