Asymmetric impact of oil market uncertainty on the US biofuel industry

Abstract

Literature has shown that crude oil prices have a significant impact on the global biofuel industry. However, previous researchers have investigated the link between fossil fuel and biofuel employing a linear framework, although energy price indexes are often nonlinear and asymmetric in nature. The present study examines whether the effect of oil‐price uncertainty on US ethanol market volatility is asymmetric. This work differs from earlier studies in that, unlike the existing literature, it considers the information content of the crude oil volatility index (OVX) as the indicator of oil market uncertainty. Methodologically, an extended EGARCH process has been employed to examine the asymmetric linkage. The findings suggest that the crude oil market creates volatility in the US ethanol industry. More specifically, ethanol volatility is negatively affected by oil volatility implying that an increase in oil volatility results in a decrease in ethanol volatility. The results also show that the impact of oil market uncertainty on the US ethanol industry is asymmetric indicating that the biofuel prices react differently to the rise and fall in crude oil volatility index. The findings further suggest that including OVX in the EGARCH process improves the volatility forecasts of the US ethanol price index. © 2018 Society of Chemical Industry and John Wiley & Sons, Ltd