Title

Dynamics of Biofuel Stock Prices: A Bayesian Approach

Campus Units

Center for Agricultural and Rural Development, Economics, Finance, Statistics

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

2010

Journal or Book Title

American Journal of Agricultural Economics

DOI

10.1093/ajae/aaq157

Abstract

We use Bayesian Markov Chain Monte Carlo methods to investigate the linkage between the volatility of ethanol security prices and the uncertainty surrounding the profitability of ethanol production and the price variations of non-ethanol energy securities. The joint evolution of return and volatility is modeled as a stochastic process that incorporates jumps in both return and volatility. While a strong and significant correlation is found between the volatility of ethanol securities and profit uncertainty from June 2005 to July 2008, the dynamic pattern of ethanol stock volatility is strikingly similar to that of the S&P 500 energy sector index in the more recent period. Our evidence lends support to the findings in the literature on rational learning from uncertainty in determining the equity price and volatility during the adoption and development of a technological innovation.

Comments

This working paper was published as Du, Xiaodong, Dermot J. Hayes and Cindy L. Yu, "Dynamics of Biofuel Stock Prices: A Bayesian Approach," American Journal of Agricultural Economics 93 (2011): 418–425, doi:10.1093/ajae/aaq157.