Biofuels or Financialization: Explaining the Increased Correlation between Grains and Crude Oil Prices
12:00 - 13:00
The correlation between grains and crude oil price returns has increased dramatically over the past decade. Alternative explanations are the use of food commodities as biofuels feedstocks and the financialization of agricultural futures markets. We estimate and implement a modified version of the standard Dynamic Conditional Correlation (DCC) multivariate GARCH model to examine these alternatives. This model proves superior to both the Constant Conditional Correlation (CCC) and the standard DCC models. We find evidence of the role of biofuels in affecting the relationship between food and energy commodity markets. We conclude that both biofuels and financialization have contributed to the observed increased correlations.