Time Varying Correlation Research Among Corn, Ethanol, and Gasoline: Copula–Garch Approach
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Ethanol is a renewable source made mostly from corn starch, and nearly 97 percent of gasoline contains ethanol in the USA. Corn for producing ethanol increased its production from 3 billion bushels in 2007 to over 5 billion bushels, which is almost 32 percent of total corn consumption in 2015. Over past decade, the biofuel expansion has impacted the price of agricultural goods and energy markets. This has incited a debate among researchers, so there are numerous studies about the price connection between biofuel and farming products. Despite some agreement on the relationship between ethanol production and the price of agricultural goods, most studies noted the wide range of estimates of the effect of biofuel on the energy market. The goal of our examination is to analyze the time-varying correlation and the dependence structure among corn, ethanol and gasoline markets. Our research method uses price data only. This paper does not create other variables deliberately because other research approaches with additional variables have estimated a wide range of results. We focus on the price data itself. Thus, we will apply Copula-GARCH model as a time series approach to design the time-varying correlation and the structure of dependency. The C-Vine Copula are made up of the three pairs which include Ethanol-Corn (E, C), Ethanol-Gasoline (E, G), and Corn-Gasoline given ethanol (C, G lE). The Clayton Coupla was picked to describe the dependence of Ethanol-Corn (E, C) with the parameter value of 0.1979 and Kendall's tau correlation of 0.0892. Likewise, the Clayton Copula is the best for estimating the pair of Ethanol-Gasoline (E, G) with the parameter value of 0.3522 and the Kendall rank correlation of 0.1492. The conditional copula of Corn-Gasoline given ethanol (C, G lE) chose the Rotated Clayton 180 degree. The estimate of the copula is 0.0517, and the Kendall rank correlation is 0.0252. According to our research findings, there are weak price correlations between corn and ethanol after implementation of the Energy Independence and Security Act of 2007.
Ha, Sang Su (2016). Time Varying Correlation Research Among Corn, Ethanol, and Gasoline: Copula–Garch Approach. Master's thesis, Texas A & M University. Available electronically from