Title

Speculation and volatility spillover in the crude oil and agricultural commodity markets: A Bayesian analysis

Campus Units

Economics, Statistics

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

5-2011

Journal or Book Title

Energy Economics

Volume

33

Issue

3

First Page or Article ID Number

497

Last Page

503

DOI

10.1016/j.eneco.2010.12.015

Abstract

This paper assesses factors that potentially influence the volatility of crude oil prices and the possible linkage between this volatility and agricultural commodity markets. Stochastic volatility models are applied to weekly crude oil, corn, and wheat futures prices from November 1998 to January 2009. Model parameters are estimated using Bayesian Markov Chain Monte Carlo methods. Speculation, scalping, and petroleum inventories are found to be important in explaining the volatility of crude oil prices. Several properties of crude oil price dynamics are established, including mean-reversion, an asymmetry between returns and volatility, volatility clustering, and infrequent compound jumps. We find evidence of volatility spillover among crude oil, corn, and wheat markets after the fall of 2006. This can be largely explained by tightened interdependence between crude oil and these commodity markets induced by ethanol production.

JEL Classification

C11, G13, Q4

Comments

This working paper was published as Du, Xiaodong, Cindy L. Yu, Dermot J. Hayes, "Speculation and volatility spillover in the crude oil and agricultural commodity markets: A Bayesian analysis," Energy Economics 33 (2011): 497–503, doi:10.1016/j.eneco.2010.12.015.