Revealing Multiscale Interdependence between Ethanol and Corn

Abstract

One of the key issues nowadays is global warming, while biofuels have been seen as potential solution for this problem. In the recent years, corn is used as a rimary raw material for ethanol production, which means that these two commodities could be highly interconnected. In this regard, this paper investigates time and frequency interdependence between corn and ethanol markets, using the wavelet coherence methodology. As a preliminary result, wavelet power spectrum reveals that increased volatility in the corn and ethanol markets is present up to 16 days and around the two major crisis. The wavelet coherence results clearly indicate that high interconnection does not exist in the short time-horizons, even at the time of the pandemic and the war in Ukraine. This means that various external shocks affect differently the two markets in the short-run. However, the areas of very high coherence are found in the time-horizons from 32 days onwards, which means that the movements of the two markets are pretty much synchronized in the longer time-horizons. This happens because longer time-horizons characterize the lack of idiosyncratic price oscillations, which means that external factors affect the two markets relatively aligned in the long-run. Future studies may use different wavelet techniques, such as wavelet correlation and cross-wavelet correlation, in order to overcome deficiencies of the wavelet coherence method.