Dynamics of energy and biofuel markets in the context of rising oil prices

Abstract

AbstractRising fossil energy prices have sparked interest in biofuels, which has led to a closer link between biofuels and fossil energy markets. We apply a thermal optimal path approach based on daily returns to examine the lead‐lag correlation between three biomass futures and three energy futures for 2020–2022. The empirical results show that the biomass futures market first leads the energy futures market with a significant probability of 20–30 days. Second, the lead days decrease sharply after regional conflicts occur, and the link between the two markets strengthens. Third, the sequence of risk transmission between overseas and domestic energy markets changes, and domestic energy markets become more resilient. Finally, the epidemic disrupted the normal transmission of signals between markets, while regional conflicts reconstructed the links, and the transmission time was shorter. In the post‐Covid‐19 period, ongoing conflicts have synchronized risks between markets, further amplifying the possibility of crises.