Price volatility in food markets: can stock building mitigate price fluctuations?

Transcription

1 Pric volailiy in food marks: can sock building miiga pric flucuaions? Trsa Srra* 1 and José M. Gil* *Cnr d Rcrca n Economia i Dsnvolupamn Agroalimnaris (CREDA) UPC IRTA, Parc Mdirrani d la Tcnologia, Edifici ESAB, C/ Esv Trrads 8, Caslldfls, Spain. 1 Conac auor. E mail: Trsa.srra dvsa@upc.du Slcd Papr prpard for prsnaion a h Inrnaional Associaion of Agriculural Economiss (IAAE) Trinnial Confrnc, Foz do Iguaçu, Brazil, Augus, Absrac This aricl sudis US corn pric flucuaions in h pas wo dcads. Pric volailiy is xplaind by volailiy clusring, h influnc of nrgy prics, corn socks and global conomic condiions. A mulivaria GARCH spcificaion ha allows for xognous variabls in h condiional covarianc modl is simad boh paramrically and smiparamrically. Findings provid vidnc of pric volailiy ransmission bwn hanol and corn marks. Thy also suggs ha macroconomic insabiliy can incras corn pric volailiy. Finally, sock building is found o significanly rduc corn pric flucuaions. Kywords: corn pric, hanol, socks, garch. Copyrigh 2012 by Trsa Srra and José M. Gil. All righs rsrvd. Radrs may mak vrbaim copis of his documn for non commrcial purposs by any mans, providd ha his copyrigh noic appars on all such copis. Th auhors grafully acknowldg financial suppor from Insiuo Nacional d Invsigacions Agrícolas (INIA) and h Europan Rgional Dvlopmn Fund (ERDF), Plan Nacional d Invsigación Cinífica, Dsarrollo Innovación Tcnológica (I+D+i), Projc Rfrnc Numbr RTA

2 Inroducion Ovr h las dcad, global food marks hav undrgon a priod of markd and prsisn volailiy. Mark insabiliy has bn spcially innsiv sinc 2006, whn inflaion in food prics was rlvan and ld o unprcdnd highs bwn 2006 and Whil in h scond half of 2008 prics dclind again, mark urbulncs rurnd in 2010 and 2011 (FAO-OECD 2011). According o FAO-OECD (2011) forcass, urbulncs ar likly o coninu in h 2010 dcad. Agriculural pric volailiy no only affcs h usually risk-avrs producrs and consumrs in dvlopd counris, bu i also undrmins food scuriy in poor naions whr housholds spnd a subsanial porion of hir incom on food. Crals, spcially corn, rprsn h mos rlvan sourc of world s food nrgy consumpion and hus ar ky o food scuriy (Wrigh 2011). Prakash (2011a) shows ha corn pric volailiy has bn growing ovr h las 50 yars. Our analysis will focus on assssing volailiy in h US corn mark. W focus on his mark for wo main rasons. Firs, bcaus h US is h major world producr and xporr of corn. US corn producion rprsns 41% of global corn oupu, whil US corn xpors rprsn around 54% of oal world xpors (in 2010 producion was on h ordr of 333 million mric ons, whil xpors wr almos 50 million mric ons) (USDA 2010). Scond, i is inrsing o sudy h US corn indusry du o h imporan changs i has rcnly undrgon, mainly rlad o h oubrak of h biofuls indusry ha has involvd an imporan shif in h dmand for corn. 1

3 Th hra ha food pric volailiy poss for boh dvloping and dvlopd naions has risn social and poliical concrns rgarding h causs of rcn nhancd pric insabiliy, is socio-conomic impacs and h insrumns availabl o miiga hm. Ths sociopoliical concrns hav influncd h acadmic agnda. A wid array of diffrn jusificaions for h rcn incrass in food pric volailiy hav bn proposd in h liraur and includ, among ohrs, massiv financial invsmns in food commodiy marks, macroconomic facors such as inrs or xchang ra flucuaions, rcn public promoion of biofuls, clima and dmographic changs, sorag, c. Whil publicaions in scinific journals on his opic ar sill scarc, hr hav bn a numbr of insiuional iniiaivs ha ar worh mnioning. FAO (Prakash 2011b) has rcnly publishd a monograph, aiming a shdding ligh on h causs and consquncs of food pric volailiy and shaping h rlad policy dba. Rcn EU calls for rsarch and chnological dvlopmn (KBBE volailiy of agriculural commodiy marks) ar an indicaor ha rsarch in agrofood marks in h upcoming yars will dvo much anion o his issu. Our aim is o conribu o h food pric volailiy liraur. Th scarc numbr of mpirical rsarch aricls shdding ligh on food pric volailiy hav focusd on h dpndnc of prics across rlad marks (Nachr and Wavr 1999, Arpgis and Rziis 2003, Buguk al. 2003). Along hs lins of rsarch, rcn work has sudid and found vidnc of pric volailiy inracions bwn food and bioful marks (Zhang al. 2009, Srra al. 2011a). Whil h horical liraur has suggsd ha sock building can play a ky rol in shaping pric volailiy, h mpirical liraur has paid lil anion o his issu. Our analysis no only allows for pric volailiy ransmission bwn bioful and food marks, bu 2

4 also sudis h impacs of corn socks on corn pric flucuaions, hus conribuing o h scarc liraur on his opic. As will b xplaind in dail blow, o achiv our objciv, a mulivaria gnralizd auo-rgrssiv condiional hroskdasic (MGARCH) modl wih xognous variabls in h condiional covarianc modl is usd. Th modl is fi using boh wll known paramric chniqus and a rcnly proposd smiparamric approximaion (Long al. 2011) ha ovrcoms h mos rlvan limiaions ha hav bn aribud o paramric mhods. Th us of vry innovaiv conomric chniqus o assss pric volailiy consius anohr conribuion of our work o h liraur. Prvious rsarch An aciv scholar dba is bing hld on h rol ha commodiy socks can play in cushioning food pric volailiy. Th horical background for his dba includs h works by Gusafson (1958), Samulson (1971), Schinkman and Schchman (1983), Williams and Wrigh (1991), Wrigh and Williams (1982 and 1984), or Daon and Laroqu (1992). Th horical liraur has focusd mos of is anion on h compiiv sorag modl ha viws socks as a ky drminan of commodiy pric bhavior and assums ha conomic agns hav raional xpcaions. Whn h currn pric is blow h xpcd pric (adjusd for financial and sorag coss), sorag will b usd by conomic agns in ordr o sll h commodiy in h fuur. 3

5 Convrsly, whn prics ar xpcd o dclin, hr will b no incnivs o sor and h sock-ou cas will b prdominan. In his lar framwork, pric bhavior will b nirly dpndn on supply shocks. As nod by Wrigh (2011) h implicaions of h sorag modl ar no y wll undrsood and widly accpd among rsarchrs. Whil h implicaions of h sorag modl for pric volailiy ar no clar cu (Siglr and Prakash 2011), Williams and Wrigh (1991) and Wrigh (2011) posula ha pric volailiy will incras as invnoris dclin. Whil in h absnc of socks prics will flucua according o supply and dmand shocks, sock building can conribu o miiga dpndncy on hs shocks. Saring on 1999/2000 h global sock o us raio for major cral grains has bn dclining. Aggrga socks of h mos rlvan crals rachd minimum lvls by 2007/2008 (Daw 2009, Wrigh 2011). I is hus possibl ha la pric volailiy in food prics bars som rlaionship o sock dplion. Whil much discussion has bn hld on h links bwn socks and pric bhavior a h horical lvl, h scarciy of saisical daa on public and priva socks has howvr limid h numbr of mpirical applicaions. Empirical rsarch rsuls ar no conclusiv. Whil Shivly (1996), Kim and Chavas (2002), Balcomb (2011) and Siglr and Prakash (2011) provid mpirical vidnc of a significan influnc of socks on mark pric bhavior, Daw (2009) and Roach (2010) find a rahr wak ffc of socks on pric volailiy. Mos of hs sudis rly upon univaria gnralizd auo-rgrssiv condiional hroskdasic (GARCH) modls ha do no allow for volailiy spillovrs across rlad marks. Allowing for volailiy inracions bwn food and nrgy marks is spcially rlvan whn assssing corn pric bhavior, givn h massiv us of corn as a fdsock in h US hanol indusry. Our objciv is o assss o wha xn socks hav an influnc on US corn pric 4

6 volailiy using a MGARCH approach ha allows for volailiy ransmission bwn US corn and hanol marks. Thr is an ampl dba on h impacs of biofuls on agriculural commodiy prics. Whil prvious rsarch findings ar rahr disprs, hr sms o b a gnral agrmn ha public promoion of biofuls has srnghnd h link bwn nrgy and agriculural marks. As bn poind ou by Srra (2011), mos analyss ha sudy h implicaions of biofuls for food prics hav focusd on pric lvls, ignoring h impacs on food pric volailiy. Balcomb and Rapsomanikis (2008) or Srra al. (2011b) ar no an xcpion o his rul. Ths auhors show ha an incras in nrgy pric lvls will lad o an incras in Brazilian sugar and US corn prics, h link bwn h wo marks bing fuld by h hanol indusry. Givn hs prvious rsarch findings, i is inrsing o assss o wha xn volailiy in nrgy prics can b ransfrrd o US corn marks. Macroconomic condiions hav bn found by prvious rsarch o also xplain pric flucuaions (Roach 2010, Balcomb 2011). As nod by Frankl (2006) inrs ras can affc commodiy pric volailiy hrough diffrn dmand and supply channls. Roach (2010) finds inrs ras o hav an impac on food pric volailiy. Th influnc of macroconomic variabls such as inrs ra insabiliy will also b considrd in our analysis o shd ligh on US corn pric volailiy. 5

7 Mhods Prvious rsarch has shown ha pric volailiy nds o vary ovr im and o display a clusring bhavior (Myrs 1994), wih priods of high (low) volailiy nding o b followd by priods of high (low) volailiy. To allow for his parn, which is usually prsn in nonsaionary im sris, w masur volailiy using GARCH modls. GARCH modls allow for volailiy clusring by spcifying currn volailiy as a funcion of pas volailiy. In ligh of prvious rsarch findings, supporing an incrasd link bwn food and nrgy prics fuld by h biofuls indusry boom, our GARCH modl will b of a bivaria naur o includ US corn and hanol prics. 1 W xpc hanol prics o influnc corn prics du o h bioful-inducd dmand for corn o produc hanol. Furhr, and sinc fdsock coss rprsn a conspicuous par of oal hanol producing coss (OECD 2006), w also xpc hanol prics o b influncd by corn prics. As is wll known, GARCH modls accommoda wo sub-modls: h condiional man and h condiional covarianc modl. Sinc prics of rlad marks ar usually coingrad (Myrs 1994), man modls in pric-sris conomrics ar usually spcifid as a vcor rror corrcion modl (VECM) which allows o capur boh h shor-run and h long-run dynamics of pric sris (quaion 1). 2 Sinc w ar 1 By suggsing ha h supply of hanol is drivd from h supply of fdsock, h conomic hory (d Gorr and Jus, 2008) suggss ha dmand forcs in hanol marks will nsur a co-movmn of hanol and fdsock prics. 2 Th final slcion of lags of h VECM was basd upon saisical significanc and parsimony. 6

8 inrsd in assssing volailiy spillovrs bwn food and nrgy marks, a mulivaria Baba-Engl-Kraf-Kronr (BEKK) GARCH spcificaion (quaion 2) is usd for h condiional volailiy modl (Engl and Kronr 1995). p ECT 1 p (1) 1 H CC' A' r r' AB' H B (2) p, 1 1 p,- 1 whr p is a 2 1 vcor of prics in firs diffrncs, ECT is a laggd rror 1 corrcion rm drivd from h coingraion rlaionship, is a 2 1 marix ha shows h adjusmn of ach pric o dviaions from h long-run pariy, and is a 2 2 marix showing h shor-run pric dynamics. Marix A is a 2 2 paramr marix ha rlas h influnc of pas mark shocks on currn pric volailiy, whil B ( 2 2) rlas h influnc of pas volailiy on currn volailiy. C is a 2 2 lowr riangular marix. Elmns c ij in marix C in (2) ar spcifid following Moschini and Myrs (2002): c ij z ij, whr z (1, z1,..., zr 1) is an r-dimnsional vcor of xognous variabls influncing pric volailiy. Paramrizing h condiional covarianc marix as a funcion of xognous variabls is a complx procss, sinc h proposd spcificaion nds o prsrv h posiiv dfininss of h marix. In conras o mos conomric spcificaions, Moschini and Myrs (2002) proposal dos no rsric h sign of h impac ha h xognous variabls can hav on pric volailiy in ordr o nsur his posiiv dfininss. 7

9 Th condiional man and covarianc modls ar, in a firs sag, joinly simad undr h assumpion of normally disribud rrors using sandard maximum liklihood procdurs. Convnional paramric MGARCH modls hav bn criicizd for wo main rasons. Firs, bcaus hy usually rly upon h assumpion of a normal disribuion of h modl rrors and scond, bcaus h condiional covarianc marix is assumd o b linar. Prvious liraur has found ampl vidnc agains boh h normaliy and linariy assumpions (Longin and Solnik 2001, Richardson and Smih 1993, Long al. 2011). Mor flxibl paramric spcificaions hav bn rcnly proposd o ovrcom hs limiaions (Capillo al. 2003, Lai al. 2009, Pllir 2006, Silvnnoinn and Träsvira 2005). Nonparamric and smiparamric mhods can also play a rol in ovrcoming misspcificaions of h disribuion rrors and h condiional covarianc funcional forms. Mos approachs in his fild hav bn mainly dvlopd in h univaria conx (Audrino 2006, Härdl and Tsybakov 1997). Long al. (2001) hav howvr proposd a smiparamric simaor of h condiional covarianc funcional form in h MGARCH modl. In a scond sag in our analysis, w adop h smiparamric mulivaria volailiy modl proposd by Long al. (2011) ha basically consiss of a nonparamric corrcion of h paramric condiional covarianc simaor. L s now assum ha h 2-dimnsional 3 vcor of rrors of h condiional man modl in (1), r ( r, r )', 1,..., T, follows h sochasic procss r F 1 P(, H; ), whr is a vcor of disribuion paramrs, F -1 is h informaion s a im 1, 3 Whil from a horical poin of viw Long al. s (2011) proposal can b xndd o highr ordr sings, h curs of dimnsionaliy affcing local smoohing mhods (Fan 2000, Son 1980) drasically rducs h usfulnss of hs xnsions. 8

10 E( r F- 1) 0, E rr F -1 ( ' ) and P is h join cumulaiv disribuion funcion (CDF). In conras o h paramric procss followd abov, no spcific assumpion is now mad rgarding h join disribuion of r. Vcor r can b xprssd as a funcion of a vcor of sandardizd rrors wih E( ) 0 F -1 and E( ' -1) Ik F : r H. No assumpion on h disribuion of 12 is ncssary o driv h smiparamric simaor ihr. Th marix symmric squar roo of covarianc marix is prsnd in (3): 12 H is h H. Th smiparamric simaor of h condiional H =H p,( ) E ( ) ( )' F -1 H p,( ) (3) whr marix H p, ( ) is h paramric simaor of H (quaion 2) and ( ) H r is h rsul of sandardizing h rrors from h paramric modl p, E ( ) ( )' F -1 is h nonparamric componn of H and is drivd undr h assumpion ha h condiional xpcaion of dpnds xclusivly on h currn ' informaion s hrough h q-dimnsional vcor x ( x1,..., xq)'. Hnc, ' E F -1 G x np. (4) 9

11 By subsiuing (4) ino (3), h following xprssion is drivd: H=H () G H () (5) p, np, p, In ordr o sima H a wo-sp procss is implmnd. Firs, an sima of, ˆ, is drivd following h paramric simaion of h condiional covarianc marix dscribd abov. Th rrors from his simaion ar hn sandardizd as follows: ˆ -1 2 ' ˆ H p, r. In h scond sag, E, F -1 x x is drivd by mans of h nonparamric Nadaraya-Wason simaor as daild blow: np, Gˆ x = T s=1 T ' ˆˆK x -x s=1 s s h s K h x -x s (6) q 1 whr s l1 l ls l l K x-x h k x x h is a mulivaria muliplicaiv krnl, and h h h,..., 1 hq is h vcor of bandwidh paramrs. Th smiparamric simaor of h condiional covarianc marix can hus b xprssd as: H ˆ = Hˆ Gˆ H ˆ (7) sp, p, np, p, 10

12 W follow Long al. (2011) and s x r -1 in h mpirical applicaion. Th krnl funcion is spcifid using h Gaussian form: 2 k u xp( u 2) 2. 4 Following Long al. (2011), h c ˆ T 1/6 i j i dfins h bandwidh, ˆi rprsns h sampl sandard dviaion of r i, T dnos h numbr of obsrvaions and c j is slcd hrough a grid sarch procss from 0.2, 0.6,,5. Th grid sarch aims a minimizing h diffrnc bwn h ru condiional covarianc marix and is simas. Bcaus h ru condiional covarianc marix is no known, h squard r vcor is usd as an approximaion (Long al. 2011, Awarani and Corradi 2005, Pllir 2006, Zangari 1997). Empirical applicaion Our mpirical implmnaion is basd on monhly nominal prics for corn and hanol, obsrvd from January 1990 o Dcmbr Informaion on pur hanol prics is obaind from h Nbraska Govrnmn (2011), whil Nbraska corn prics rcivd by farmrs ar drivd from h Naional Agriculural Saisics Srvic (NASS 2011). A ky objciv of his aricl is o modl h impacs of corn socks on pric volailiy. Sinc i is basd upon h assumpion ha producion occurs a vry im priod, h compiiv sorag modl is only capabl of xplaining yarly pric flucuaions (Wrigh 2011). Working wih annual daa involvs wo main shorcomings. Firs, i subsanially rducs h numbr of obsrvaions availabl for conomric 4 This univaria Gaussian krnl is a componn of h mulivaria muliplicaiv krnl funcion in (6). 11

13 modl simaion and, scond, i involvs losing informaion conaind in mor frqun and availabl daa. As a rsul, w follow Siglr and Prakash (2011) who propos o sudy mark racions o h forcass on h socks o disapparanc raio mad by official organisms. As argud by hs auhors, forcass ar likly o b mor influnial han x-pos annual socks ha ar unknown by conomic agns a h im. Following Schwagr (1984), wha conomic agns bliv o b ru may b mor rlvan for pric drminaion han wha is acually ruh. Our analysis uss monhly socks-o-disapparanc forcass 5 for h subsqun nd-of-sason publishd by h USDA (2011). Th publishd forcas from January o April is for h currn yar, whil from May o Dcmbr, forcass ar publishd for h following crop yar. As nod by Siglr and Prakash (2011), conomic agns may no giv h sam rlvanc o forcass clos o h nd of sason han o forcass for longr horizons. This may cra som hrogniy in ha forcass publishd hroughou h yar may no hav h sam impacs on pric bhavior. As nod abov, sinc prvious rsarch has found macroconomic variabls o b rlvan o xplain pric bhavior, h influnc of h inrs ra volailiy is also considrd. Th six-monh moving varianc of scondary mark ras for h 3-monh US rasury bills is usd in his analysis. 6 Monhly inrs ras ar drivd from h Board of Govrnors of h Fdral Rsrv Sysm (2011). A prliminary analysis of h pric im-sris sudid suggsd ha boh corn and hanol prics hav a uni roo. Johansn (1988) coingraion ss suggs ha 5 Th socks-o-disapparanc raio is h raio of socks o domsic consumpion plus xpors. 6 Th sam variabl in lvl form as wll as US dollar xchang ras boh in lvls and in varianc form wr considrd, bu no found o b saisically significan. 12

14 corn and hanol marks mainain a long-run quilibrium rlaionship whrby hs wo prics ar posiivly rlad. 7 As will b sn blow, boh hanol and corn prics rspond o dviaions from his pariy (abl 1). A long-run posiiv link bwn h wo prics is no surprising and is rlad o h fac ha fdsock prics rprsn h major hanol producion cos. Hnc, an incras in fdsock prics will yild an incras in hanol prics. Such posiiv link is also du o h rlvan porion of US corn producion bing ransformd ino hanol in h US: around 35% in h marking yar (USDA 2011). An incras in hanol prics is an indicaor of an incras in hanol dmand, which in urn ighns corn marks and ss corn quilibrium pric o a highr lvl. By normalizing wih rspc o h hanol pric, h coingraion rlaionship can b xprssd as follows, whr numbrs in parnhsis rprsn sandard rrors, p is h hanol pric and 1 p is h corn pric: 2 p 0.313p (0.115) (0.299) (8) Th rsuls of h simaion of h MGARCH modl wih xognous variabls ar prsnd in abl 1. W firs inrpr h condiional man modl ha asssss pric lvl bhavior and ha, lik h condiional covarianc modl, dos no mak any a priori assumpion on casualiy links among h variabls considrd. Currn hanol pric changs dpnd on hir own lags, on pas corn pric changs and on h dviaions from h long-run pariy prsnd in (8). Currn corn pric changs also 7 Dails on uni roo and coingraion sing ar no prsnd hr, bu ar availabl from h auhors upon rqus. 13

15 dpnd on hir own lags and on disquilibriums from h corn-hanol long-run pariy. Hnc, boh hanol and corn ar ndognous for long-run paramrs, a rsul compaibl wih h findings of Srra al. (2011b) and Balcomb and Rapsomanikis (2008). Our rsuls, howvr, diffr from hos obaind by Zhang al. (2009) who do no find US corn and nrgy marks o b rlad in h long-run afr h oubrak of h US hanol indusry in W now mov o h inrpraion of h condiional covarianc modl. Th BEKK modl is covarianc saionary sinc h ignvalus of A ABB, whr dnos h Kronckr produc, ar lss han on in modulus. As is wll known, individual cofficins in h MGARCH paramrizaion canno b dircly inrprd. Infrncs, howvr, can b drawn from h nonlinar paramr funcions in h condiional varianc quaions prsnd in abl 2. Rsuls suggs ha hanol pric volailiy ( h 11 ) is influncd by is own lags (highr condiional volailiy in h pas, h11 1, lads o highr currn volailiy), as wll as wih pas shocks in h hanol mark ( r 2 ). Corn influncs hanol pric volailiy indircly hrough h inracion 1 1 r r rm Corn pric volailiy ( h 22 ) is found o grow wih is own laggd volailiy ( h 22 1 ), whil pas volailiy in hanol marks influncs corn volailiy hrough h covarianc rm ( h 12 1 ). Tabl 2 furhr shows h influnc of socks and inrs ra variabiliy on corn pric volailiy. To draw mor spcific conclusions on his issu, h n ffcs of hs wo variabls on h variancs of h wo prics sudid ar prsnd in abl 3. Mor spcifically, abl 3 shows h n impacs of corn invnoris, z 1, and inrs ra volailiy, z 2, on corn and hanol pric volailiy. W prsn boh h firs drivaivs 14

16 of h 11 and h 22 wih rspc o z1 and z 2, as wll as h valu of hs drivaivs compud a h daa mans. Rsuls suggs ha, a h daa mans, h n impacs of socks on pric volailiis ar ngaiv. This is compaibl wih h hory ha sock building can rduc mark dpndncy on shocks, and hus pric insabiliy (Williams and Wrigh 1991, Wrigh 2011). I is also compaibl wih h findings of Shivly (1996), Kim and Chavas (2002), Balcomb (2011) or Siglr and Prakash (2011). Th paramrs in h hanol pric volailiy quaion, howvr, ar no saisically diffrn from zro, hus indicaing ha corn sock building s impacs on hanol pric volailiy ar no significan. An incras in inrs ra volailiy, which can b undrsood as an incras in conomic insabiliy, is found o hav a posiiv influnc on hanol and corn pric volailiy. Onc mor, h paramrs in h hanol pric varianc quaion ar no saisically significan. Anohr sp in his aricl is o apply h nonparamric corrcion proposd by Long al. (2001) o h paramric condiional covarianc simaor in ordr o capur informaion sill rmaining in h rsiduals of h modl, and driv simas ha ar robus o misspcificaion of h paramric modl. Sinc h applicaion of such mhodology involvs using local smoohing chniqus, h whol s of condiional covarianc paramr simas is drivd for ach obsrvaion in h sampl. In figur 1 w show h variabiliy of h localizd nonlinar paramrs in h condiional varianc quaion for corn. Th variabiliy is rlvan in abou half of h paramrs, whr h mos frqun valu rprsns around 60% of localizd paramr simas. For h rs of h paramrs, h variabiliy is much lss and h mos frqun valu rprsns bwn 80 and 90% of h localizd simas. This variabiliy has implicaions for h simaion of h n impacs of socks and inrs ras on pric volailiy: h smiparamric modl allows driving hs n impacs for ach 15

17 obsrvaion in h sampl. Figur 2 prsns h voluion ovr im of h firs drivaiv of corn pric volailiy wih rspc o socks (compud a h daa mans). For comparison purposs, h voluion of h socks o disapparanc raio is also prsnd. This figur shows ha h marginal capaciy of socks o rduc corn pric volailiy has ndd o incras ovr im as socks hav dclind, i.., an incras in socks is mor ffciv o conrol pric variabiliy whn sock lvls ar low han whn hy ar high. Figur 3 prsns h voluion ovr im of h firs drivaiv of corn pric varianc wih rspc o inrs ra volailiy (compud a h daa mans). Th voluion of h inrs ra volailiy is also graphd. Th graphs provid vidnc ha usually h n impacs of inrs ra volailiy ar spcially rlvan during priods of high inrs ra flucuaions. In spi of h variaion in h localizd paramr simas, h s for h null of corrc spcificaion of h paramric covarianc simaor proposd by Long al. (2011) suggss ha h paramric modl can b rusd. 8 To br undrsand h impacs of socks and macroconomic insabiliy on corn pric volailiy and givn h fac ha h paramric modl is found o b wll spcifid, w simula volailiy rsponss o a on-im 10% incras in h xognous variabls. Th diffrncs bwn h prdicd corn varianc wih and wihou h shocks ar prsnd in figurs 4 and 5. For comparison purposs, h impac of a 10% incras in hanol pric volailiy is also graphd and compud in figur 6. Figur 4 shows ha a on-im incras in corn socks involvs a mporary dclin in corn pric volailiy ha sabilizs a a smallr valu afr abou 15 monhs following h shock. An incras in h inrs ra varianc causs a vry small posiiv ffc on corn pric 8 Dails on his s can b found in Long al. (2011). Rsuls ar no prsnd hr, bu ar availabl from h auhors upon rqus. 16

18 volailiy ha is compld afr abou on yar following h shock (figur 5). An incras in hanol pric volailiy causs an incras in corn pric volailiy ha is also compld afr a yar (figur 6). I is noworhy ha h impacs of socks in h shorrun (firs 9 monhs following h shock) ar vry high rlaiv o h impacs of inrs ra and hanol pric volailiy. Howvr, in h long-run, h hanol pric firs and h inrs ra volailiy scond ar found o hav h srongs influnc. Hnc, our rsuls suggs ha US corn pric volailiy is no only influncd by nrgy pric volailiy, bu also by corn socks, as wll as by h prvaln macroconomic condiions. Whil prvious rsarch has paid spcial anion o volailiy spillovrs bwn food and nrgy marks, h influnc of socks and macroconomic condiions has no bn sudid in dph. Our mpirical rsuls show h rlvanc of doing so. Concluding rmarks Th scarc liraur on food pric insabiliy has mainly focusd on pric volailiy ransmission across inrrlad marks (Nachr and Wavr 1999, Arpgis and Rziis 2003, Buguk al. 2003). Along hs rsarch lins, rcn liraur on h impacs of biofuls on food pric volailiy has assssd and found vidnc of volailiy spillovrs bwn food and nrgy marks (Zhang al. 2009, Srra 2011). Whil pric ransmission from nrgy o food marks can conribu o xplain food pric volailiy, h conomics liraur has suggsd a numbr of ohr variabls ha can also b rlvan. Th compiiv sorag modl viws socks as a ky drminan of 17

19 agriculural pric bhavior. Macroconomic variabls rprsning global conomic condiions hav also bn considrd o xplain mark flucuaions. This aricl sudis US corn pric volailiy ovr h las wo dcads by allowing for h influnc of hanol marks, corn socks and global conomic condiions as rprsnd by flucuaions in h inrs ra. An MGARCH modl which is simad boh paramrically and smiparamrically is usd for his purpos. Our conribuion o h liraur is wofold. On h on hand w add o h scarc liraur on h ffcs of socks and macroconomic condiions on mark insabiliy and on h ohr, w apply vry innovaiv smiparamric chniqus o assss food pric flucuaions. In accordanc wih conomic hory, sock building is found o urn down corn pric insabiliy. Economic insabiliy brings mor volail food prics. As xpcd, an incras in hanol pric volailiy causs an incras in corn pric volailiy. Whil h impacs of socks in h vry shor-run ar vry high rlaiv o h ffcs of nrgy pric and macroconomic insabiliy, in h long-run h hanol pric and inrs ra volailiy ar found o hav h srongs impacs. Th localizd paramr simas drivd from h smiparamric approach show ha h marginal impacs of socks ar dcrasing wih sock lvls, i.., i is mor ffciv, for h purpos of curbing down pric flucuaions, o incras socks whn hs ar vry low han whn hy ar vry high. Our rsuls show h rlvanc of xnding analyss of volailiy spillovrs bwn food and nrgy marks, o a considraion of a widr array of xplanaory variabls. Our rsarch has imporan policy implicaions. Firs, our rsuls suggs ha public sock managmn appars o b a powrful ool o miiga food pric 18

20 insabiliy, spcially in priods of low socks. Furhr, public promoion of scond gnraion biofuls ha ar no basd on food commodiis, may conribu o rduc nrgy-food pric links, which may lad o mor sabl food prics. Any policy dircd owards safguarding macroconomic sabiliy is also likly o yild lss volail food prics. 19

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27 Tabl 1. Ehanol ( p ) corn ( 1 p ) MGARCH modl: man and varianc quaions 2 Shor-run dynamic paramrs: p p1-1 ECT 1 p p2-1 i 1 i 2 i * (0.016) 0.028* (0.017) 1i 0.233** (0.059) 0.100** (0.034) 2i (0.048) 0.398** (0.059) GARCH modl paramrs: c 0 c 0 z 0 c 0 z 0 C, c211 c221 c212 c222 z1 z1 c213 c223 z2 z2 b B b b c 11 i (0.022) b a A a a a i 1 i 2, and c 21 i (0.091) 0.144** (0.025) c 12 i (0.103) c 22 i (0.531) ** (0.129) c 13 i 0.095** (0.031) c 23 i (0.045) 0.103** (0.032) a 1i 0.375** (0.042) ** (0.042) a 2i 0.080**(0.035) (0.068) b 1i 0.918** (0.016) 0.056** (0.019) b 2i (0.015) 0.903** (0.018) Eignvalus of AABB *(**) dnos saisical significanc a h 10(5) pr cn significanc lvl 26

28 Tabl 2. Condiional varianc quaions h z z z z zz ** h h h ** r ** r 1 1 r r2 1 h ** ** z z ** z ** z ** zz h ** h ** h r r 1 1 r r2 1 *(**) dnos saisical significanc a h 10(5) pr cn significanc lvl 27

29 Tabl 3. N ffcs of h xognous variabls on pric volailiy a h daa mans h z z z 2 = h z z z 1 = h z ** z ** ** z 2 = h z z ** ** z 1 = *(**) dnos saisical significanc a h 10(5) pr cn significanc lvl 28

30 Fig 1. Hisograms of h localizd paramr simas for h P r c n P r c n consan Z P r c n P r c n Z1 2 Z1 29

31 P r c n P r c n Z h P r c n P r c n Z1Z h 12 30

32 P r c n P r c n h 22 r1r P r c n P r c n r r2 2 31

33 Fig 2. Localizd n ffcs of h socks o disapparanc raio on corn pric volailiy and voluion of his raio ovr im Tim 1990: : : : : : : : : : : : : : : : : : : : : : :09 N impac Socks : : : : : : : : : : : : : : : : : : : : : : :09 Tim 32

34 Fig 3. Localizd n ffcs of inrs ra volailiy on corn pric volailiy and voluion of inrs ra volailiy ovr im N impac : : : : : : : : : : : : : : : : : : : : : : :09 Tim Inrs ra volailiy : : : : : : : : : : : : : : : : : : : : : : :09 Tim 33

35 Fig 4. Corn volailiy rspons o a on-im 10% incras in corn invnoris monhs afr h shock chang in volailiy Fig 5. Corn volailiy rspons o a on-im 10% incras in h inrs ra volailiy chang in volailiy E monhs afr h shock 34

36 Fig 6. Corn volailiy rspons o a on-im 10% incras in hanol pric volailiy chang in volailiy E E 18 5E 05 monhs afr h shock