Journal of Commodity Markets 15 (2019) 100068

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Journal of Commodity Markets

journal homepage: www.elsevier.com/locate/jcomm

The ethanol mandate and crude oil and biofuel agricultural

commodity price dynamics☆
Apostolos Serletis a,*, Libo Xu b
a Department of Economics, University of Calgary, Canada
b
Department of Economics, University of San Francisco, USA

A R T I C L E I N F O A B S T R A C T

JEL classification: We investigate mean and volatility spillovers between the crude oil market and the main biofuel
C32 feedstock markets (corn, soybean, and sugar). In doing so, we estimate a four-variable vector
E32 error correction (VEC)–GARCH–in–Mean model with a BEKK representation for the variance
E52
equation, and also examine the possible effects of the ethanol mandate by including a dummy
variable in both the conditional mean and variance equations. We find that the oil market and the
Keywords:
biofuel feedstock markets are tightly interconnected and that the ethanol mandate has strength-
VEC–GARCH–In–Mean ened their linkages in terms of volatility spillovers.
BEKK model
Mean and volatility spillovers
Structural breaks

1. Introduction

There have been significant changes in the dynamics between fossil fuel and agricultural commodity prices, after the United States
enacted in 2005 the Renewable Fuel Standard, also known as ethanol mandate. The Renewable Fuel Standard was also expanded
later in 2007, under the Energy Independence and Security Act, and specifies that gasoline and diesel contain a certain amount
of biofuel (mostly ethanol), derived from feedstocks (such as corn, soybean, and sugar). Silvennoinen and Thorp (2016) provide a
discussion of similar renewable fuel policies in other countries, and Du and McPhail (2012), Hertel et al. (2012), and Abbott (2014),
among others, discuss the role that biofuels play in determining the prices and volatility of agricultural commodities.
Fossil fuel and agricultural commodity prices have always been connected on the production side, as crude oil (and also natural
gas) contribute a large part of agricultural input costs. However, the ethanol mandate, introduced to promote energy security and
to address environmental concerns, now connects these prices on the consumption side as well. In particular, it created a direct link
between fossil fuels and agricultural commodities used in renewable fuel production with potential spillover effects from the crude
oil market to biofuel feedstock markets and possibly other agricultural commodity markets.
In this paper, we apply recent advances in financial econometrics to give new insights into the relationship between the crude
oil market and the main biofuel feedstock markets — corn, soybean, and sugar. Our sample covers the introduction of the ethanol
mandate, the sharp increases in oil and food prices in 2008 and 2010, and the global financial crisis and Great Recession. The results
show a strengthening of the relationship between the crude oil market and the biofuel feedstock markets after the introduction of

☆ We would like to thank the Editor, Dr. B. Simkins, and an anonymous referee for comments that greatly improved the paper.
* Corresponding author.
E-mail address: Serletis@ucalgary.ca (A. Serletis).
URL: http://econ.ucalgary.ca/serletis.htm (A. Serletis).

https://doi.org/10.1016/j.jcomm.2018.07.001
Received 17 December 2017; Received in revised form 7 May 2018; Accepted 6 July 2018
Available online 10 July 2018
2405-8513/© 2018 Elsevier B.V. All rights reserved.
A. Serletis and L. Xu Journal of Commodity Markets 15 (2019) 100068

Table 1
Contemporaneous correlations between series.
A. Logged levels B. First differences of log levels

Oil Soybean Sugar Corn Oil Soybean Sugar Corn

Oil 1 0.988 0.988 0.989 1 0.124 0.101 0.119
Soybean 0.988 1 0.991 0.999 0.124 1 0.160 0.596
Sugar 0.988 0.991 1 0.992 0.101 0.160 1 0.148
Corn 0.989 0.999 0.992 1 0.119 0.596 0.148 1
𝜒 2 (6) → + ∞ 𝜒 2 (6) = 774.044
Note: Sample period, weekly data, 1986:03:06–2016:03:10.

the biofuel policy. This has potential implications on food security, as it could upset the relationship between food producers and
consumers.
Our study complements Silvennoinen and Thorp (2016), and our methodological approach represents an original contribution
to the literature. We model the crude oil and biofuel feedstock markets in a systems context, with a focus on both first (mean) and
second (volatility) moment linkages, using a four-variable VEC-GARCH-in-Mean model with a BEKK specification for the variance
equation. We also contribute to the literature by examining the possible effects of the ethanol mandate by including a dummy
variable in both the conditional mean and variance equations to allow for structural changes in the data-generating process and
capture the effects of the renewable fuel policy.
The paper is organized as follows. Section 2 discusses the data and investigates their time series properties. Sections 3 and 4
describe the methodology and present the empirical results. The final section concludes the paper.

2. Data and basic facts

We use weekly data over the period from March 6, 1986 to March 10, 2016. For the oil price series (ot ), we use the West Texas
Intermediate (WTI) spot price, which is measured in dollars per barrel. For the soybean price series (bt ), we use the one-month
futures price, measured in cents per bushel. The sugar price (st ) is the one-month futures price, measured in cents per pound, and
the corn price (ct ) is also the one-month futures price, in cents per bushel. All of the futures prices were obtained from Bloomberg.
Panel A of Table 1 presents the contemporaneous correlations between the log levels of the series (ln ot , ln bt , ln st , and ln ct ) and
panel B those between the first differences of the logs (Δ ln ot , Δ ln bt , Δ ln st , and Δ ln ct ). To determine whether these correlations
are statistically significant, we follow Pindyck and Rotemberg (1990) and perform a likelihood ratio test of the hypothesis that the
correlation matrix is equal to the identity matrix. The test statistic is
( )
−2 ln |R|N∕2

where |R| is the determinant of the correlation matrix and N is the number of observations. This test statistic is distributed as 𝜒 2
with 0.5q(q − 1) degrees of freedom, where q is the number of series. The test statistic is very large with a p-value of 0.000 for the
logged values and 774.044 with a p-value of 0.000 for the first differences of the logs. Clearly, the hypothesis that these data series
are uncorrelated is rejected.
We also conduct a battery of unit root and stationary tests in panel A of Table 2 in the natural log of each of the series. In
particular, we use the Augmented Dickey-Fuller (ADF) test [see Dickey and Fuller (1981)] and the Dickey-Fuller GLS test [see Elliot
et al. (1996)], assuming both a constant and trend, to determine whether the series have a unit root. The optimal lag length is taken
to be the order selected by the Bayesian information criterion (BIC) after we assume a maximum lag length of 4 for each series.
Moreover, given that unit root tests have low power against trend stationary alternatives, we also use the KPSS test [see Kwiatkowski
et al. (1992)] to test the null hypothesis of stationarity around a trend. As shown in panel A of Table 2, the null hypothesis of a
unit root is rejected at conventional significance levels by both the ADF and DF-GLS test statistics. Moreover, the null hypothesis of
trend stationarity can be rejected at conventional significance levels by the 𝜂̂𝜏 KPSS test. We thus conclude that each of the series
is nonstationary, or integrated of order one, I(1). In Panel B of Table 2, we repeat the unit root and stationarity tests using the first
differences of the logarithms of the series. The null hypotheses of the ADF and DF-GLS tests are in general rejected and the null
hypothesis of the KPSS test cannot be rejected, suggesting that the first differences of the logarithms of the series are stationary, or
integrated of order zero, I(0).

3. The econometric model

Normally, the presence of unit roots would suggest logarithmic first differences as the correct data representation in our model.
However, using Johansen’s (1988) maximum likelihood method, we find evidence of cointegration among the four series, and in
particular evidence for two cointegration vectors. Therefore, we use a vector error correction (VEC) formulation in the logs of the
series for the mean equation. We also use the Baba, Engle, Kraft, and Kroner (BEKK) specification for the variance equation. Moreover,
we augment the model by allowing GARCH–in–Mean terms in order to investigate how one price is affected by the volatility of the

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A. Serletis and L. Xu Journal of Commodity Markets 15 (2019) 100068

Table 2
Unit root and stationary tests.
Price series Test Decision

ADF DF-GLS KPSS

A. Logged levels
Oil −1.988 −2.567 2.668 I(1)
Soybean −2.435 −2.605 3.587 I(1)
Sugar −3.095 −2.667 2.938 I(1)
Corn −2.599 −2.674 2.616 I(1)

B. Logged first differences

Oil −43.115 −4.098 0.071 I(0)
Soybean −39.788 −17.400 0.046 I(0)
Sugar −25.805 −13.233 0.034 I(0)
Corn −39.253 −16.557 0.041 I(0)
Notes: Sample period, weekly observations, 1986:03:06–2016:03:10.
The 1% and 5% critical values are −3.983 and −3.422 for the ADF test, −3.480
and −2.890 for the DF-GLS test, and 0.216 and 0.146 for the KPSS test, respec-
tively.

other prices. Finally, we follow Serletis and Xu (2018) and allow for a break in the coefficients of the mean and variance equations.
Thus, our model is a VEC–GARCH–in–Mean model with a BEKK(1,1,1) specification for the variance equation, as follows
∑
n √
̃ × D) + (𝝀 + ̃
Δzt = (Φ + 𝚽 𝝀 × D)𝝅 zt−1 + ̃ i × D)Δzt−i + (𝚿 + 𝚿
(𝚪i + 𝚪 ̃ × D) ht + 𝝐 t (1)
i=1

where
⎡hoo,t hob,t hos,t hoc,t ⎤
⎢ ⎥
⎢h hbb,t hbs,t hbc,t ⎥
𝝐 t ∣ Ωt−1 ∼ N (0, H t ) ; H t = ⎢ bo,t ⎥
⎢ hso,t hsb,t hss,t hsc,t ⎥
⎢ ⎥
⎣ hco,t hcb,t hcs,t hcc,t ⎦

and
⎡ln ot ⎤ ⎡𝛾i,11 𝛾i,12 𝛾i,13 𝛾i,14 ⎤ ⎡̃
𝛾 i,11 ̃
𝛾 i,12 ̃
𝛾 i,13 𝛾 i,14 ⎤
̃
⎢ ⎥ ⎢ ⎥ ⎢ ⎥
⎢ln bt ⎥ ⎢𝛾i,21 𝛾i,22 𝛾i,23 𝛾i,24 ⎥ ̃i ⎢𝛾 i,21
⎢̃ ̃
𝛾 i,22 ̃
𝛾 i,23 ̃
𝛾 i,24 ⎥
zt = ⎢ ⎥ ; 𝚪i = ⎢ ⎥; 𝚪 ⎥;
⎢ ln st ⎥ ⎢𝛾i,31 𝛾i,32 𝛾i,33 𝛾i,34 ⎥ ⎢̃
𝛾 i,31 ̃
𝛾 i,32 ̃
𝛾 i,33 ̃
𝛾 i,34 ⎥
⎢ ⎥ ⎢ ⎥ ⎢ ⎥
⎣ ln ct ⎦ ⎣𝛾i,41 𝛾i,42 𝛾i,43 𝛾i,44 ⎦ ⎣̃
𝛾 i,41 ̃
𝛾 i,42 ̃
𝛾 i,43 ̃
𝛾 i,44 ⎦

⎡𝜖o,t ⎤ ⎡𝜓11 𝜓12 𝜓13 𝜓14 ⎤ ⎡𝜓̃ 11 𝜓

̃ 12 𝜓
̃ 13 ̃ 14 ⎤
𝜓
⎢ ⎥ ⎢ ⎥ ⎢ ⎥
𝜖
⎢ ⎥ ⎢𝜓 𝜓22 𝜓23 𝜓24 ⎥ ̃ = ⎢⎢ ̃ 21
𝜓 𝜓
̃ 22 𝜓
̃ 23 𝜓
̃ 24 ⎥
𝝐 t = ⎢ b,t ⎥ ; 𝚿 = ⎢ 21 ⎥; 𝚿 ⎥;
⎢ 𝜖s,t ⎥ ⎢𝜓31 𝜓32 𝜓33 𝜓34 ⎥ ⎢𝜓̃ 31 𝜓
̃ 32 𝜓
̃ 33 𝜓
̃ 34 ⎥
⎢ ⎥ ⎢ ⎥ ⎢ ⎥
⎣ 𝜖c,t ⎦ ⎣𝜓41 𝜓42 𝜓43 𝜓44 ⎦ ⎣𝜓̃ 41 𝜓
̃ 42 𝜓
̃ 43 𝜓
̃ 44 ⎦

⎡hoo,t ⎤ ⎡𝜆11 𝜆12 ⎤ ⎡𝜆̃11 𝜆̃12 ⎤

⎢ ⎥ ⎢ ⎥ ⎢ ⎥
⎢hbb,t ⎥ ⎢𝜆21 𝜆22 ⎥ ̃ ⎢𝜆̃21 𝜆̃22 ⎥
ht = ⎢ ⎥; 𝝀 = ⎢ ⎥; 𝝀 = ⎢ ⎥ .
⎢ hss,t ⎥ ⎢𝜆31 𝜆32 ⎥ ⎢𝜆̃31 𝜆̃32 ⎥
⎢ ⎥ ⎢ ⎥ ⎢̃ ⎥
⎣ hcc,t ⎦ ⎣𝜆41 𝜆42 ⎦ ⎣𝜆41 𝜆̃42 ⎦

with Φ and 𝚽 ̃ being the intercept matrices before and after the ethanol mandate, respectively, Ωt−1 the information set available in
period t − 1, and D a dummy variable taking the value of zero before 2006 and the value of 1 after 2006 when the ethanol mandate
is expected to have changed the relationship between the crude oil market and the soybean, sugar, and corn markets — see Coronado
et al. (2018). That is
{
0 before January 5, 2006
D=
1 after January 5, 2006.

Given the presence of cointegration between the four price series, we have the error correction terms in the mean equation. The
associated coefficient vectors in 𝝅 are the two cointegrating vectors which are predetermined and extracted from the Johansen (1988)

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A. Serletis and L. Xu Journal of Commodity Markets 15 (2019) 100068

test. The 𝝀 matrix captures how each price series responds to deviations from the long-run equilibrium relationship between the oil,
soybean, sugar, and corn prices. In particular, we assume these responses are affected by the ethanol mandate and that ̃ 𝝀 captures
the changes of the responses, following Balcilar et al. (2015).
The BEKK(1,1,1) specification for the variance equation is a multivariate extension of the GARCH(1,1) process, and is as follows
( )′ ( )
̃ × D)(C + C
H t = (C + C ̃ × D )′ + (B + B
̃ × D )′ H t −1 (B + B
̃ × D) + A + A
̃ × D 𝝐 t −1 𝝐 ′ ̃×D
A+A (2)
t −1

where

⎡𝛼11 𝛼12 𝛼13 𝛼14 ⎤ ⎡𝛼̃11 𝛼 12

̃ 𝛼 13
̃ ̃14 ⎤
𝛼
⎢ ⎥ ⎢ ⎥
⎢𝛼21 𝛼22 𝛼23 𝛼24 ⎥ 𝛼
̃
̃ = ⎢⎢ 21
𝛼 22
̃ 𝛼 23
̃ 𝛼
̃24 ⎥
A=⎢ ⎥; A ⎥;
⎢𝛼31 𝛼32 𝛼33 𝛼34 ⎥ ⎢̃31
𝛼 𝛼 32
̃ 𝛼 33
̃ 𝛼
̃34 ⎥
⎢ ⎥ ⎢ ⎥
⎣𝛼41 𝛼42 𝛼43 𝛼44 ⎦ ⎣𝛼̃41 𝛼 42
̃ 𝛼 43
̃ 𝛼
̃44 ⎦

⎡𝛽11 𝛽12 𝛽13 𝛽14 ⎤ ⎡𝛽̃11 𝛽̃12 𝛽̃13 𝛽̃14 ⎤

⎢ ⎥ ⎢ ⎥
⎢𝛽 𝛽22 𝛽23 𝛽24 ⎥ 𝛽̃ 𝛽̃22 𝛽̃23 𝛽̃24 ⎥
B = ⎢ 21 ̃ = ⎢⎢ 21
⎥; B ⎥
⎢𝛽31 𝛽32 𝛽33 𝛽34 ⎥ ⎢𝛽̃31 𝛽̃32 𝛽̃33 𝛽̃34 ⎥
⎢ ⎥ ⎢̃ ⎥
⎣𝛽41 𝛽42 𝛽43 𝛽44 ⎦ ⎣𝛽 41 𝛽̃42 𝛽̃43 𝛽̃44 ⎦

and C is a triangular matrix to ensure positive definiteness of H.

Our model contains 152 mean equation parameters and 84 variance equation parameters (for a total of 236 parameters). The
linkages between the oil, soybean, sugar, and corn markets are captured by the 𝚽, 𝝀, 𝚪i , 𝚿i , C, A, and B coefficient matrices before
the ethanol mandate, and by the 𝚽 + 𝚽 ̃, 𝝀 + 𝝀 ̃i , 𝚿 + 𝚿
̃, 𝚪i + 𝚪 ̃, C + C
̃, A + A
̃ , and B + B
̃ matrices during the ethanol mandate period.
It is to be noted that conventional time series analysis is generally based on VAR or VECM models which do not accommodate
conditional heteroskedasticity. However, conditional heteroskedasticity is common in financial time series. Combining them together,
not only improves the modeling of the data, but also allows us to understand second moment (volatility) linkages. It is for this reason
that multivariate conditionally heteroskedasticity models have been widely used in recent empirical work. Regarding the asymptotic
properties of the estimators of these general multivariate conditionally heteroskedastic models, Bollerslev and Wooldridge (1992)
show that the quasi-maximum likelihood estimator is consistent and asymptotically normal, even if the true data generating process is
not conditionally normal. For the multivariate conditionally heteroskedastic model having constant conditional correlations (CCC),
Jeantheau (1998) proves the strong consistency of the quasi-maximum likelihood estimator, and Ling and McAleer (2003) show
the asymptotic normality. For the multivariate model with a BEKK specification, Comte and Lieberman (2003) prove the strong
consistency of the quasi-maximum likelihood estimator and the corresponding asymptotic normality. The asymptotic theory for the
multivariate model with a general vector specification proposed by Bollerslev et al. (1988) is established by Hafner and Preminger
(2009).

4. Empirical evidence

The four-variable VEC–GARCH–in–Mean BEKK(1,1,1) model with a structural break in January 5, 2006, consisting of equations
(1) and (2), is estimated by the Quasi Maximum Likelihood method. We use the Bayesian information criterion to choose the number
of lags and so we allow 3 lags in the estimation. Tables 3 and 4 report the coefficients estimates (with p-values in parentheses) for
the periods before the ethanol mandate and after the ethanol mandate, respectively. Since there is a large number of coefficients in
the tables, we only pay attention to the coefficients that are statistically significant at the 5% level.
The coefficients in the 𝛌 matrix suggest that the crude oil and corn prices respond to shocks to the long run equilibrium, with
𝜆11 and 𝜆32 being statistically significant. After the ethanol mandate, the sugar and corn prices respond to those shocks according to
the coefficients in the 𝝀 + ̃ 𝝀 matrix in Table 4. Note that the cointegrating vectors are not unique and that we do not normalize the
cointegrating vectors, meaning that we cannot identify the shocks to the long run equilibrium. The autoregressive coefficients in the
𝚪1 , 𝚪2 , and 𝚪3 matrices in Table 3 are mostly insignificant, except for 𝛾 1,11 and 𝛾 2,33 , suggesting that in the case of the oil and sugar
markets, previous market performance is useful in predicting current market performance. After the ethanol mandate, however, it
becomes difficult to predict, since the autoregressive coefficients in the 𝚪1 + 𝚪 ̃ 1 , 𝚪2 + 𝚪
̃ 2 , and 𝚪3 + 𝚪
̃3 matrices in Table 4 are all
statistically insignificant.
We find statistically significant spillover effects across the oil, soybean, sugar, and corn markets, according to the coefficients in
the off diagonals of the 𝚪1 , 𝚪2 , and 𝚪3 matrices in Table 3. For example, based on the 𝚪1 matrix, 𝛾 1,14 with a p-value of 0.008 suggests
that a higher corn price growth rate leads to a decrease in the growth rate of the crude oil price in the next period. On the other hand,
a higher crude oil price growth rate leads to a decrease in the corn price growth rate in the next period (𝛾 1,41 = − 0.052 with a
p-value 0.003). Another spillover is from sugar to soybean and we find that a higher sugar price growth rate leads to a decrease in the
soybean price growth rate in the next period. However, the spillover effects change notably after the ethanol mandate, as is indicated
by the coefficients of the 𝚪1 + 𝚪 ̃ 1 , 𝚪2 + 𝚪
̃2 , and 𝚪3 + 𝚪
̃3 matrices in Table 4. We only observe three spillover effects in the time period
after the ethanol mandate. In particular, it is found that a higher growth rate of the crude oil price leads to a lower growth rate of
the corn price (𝛾1,41 + ̃
𝛾 1,41 is negative and statistically significant), and the magnitude of this effect is larger (𝛾1,41 + ̃
𝛾 1,41 = −0.066)

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A. Serletis and L. Xu Journal of Commodity Markets 15 (2019) 100068

Table 3
The four-variable VEC-GARCH-in-Mean BEKK(1,1,1) model, before the ethanol mandate.
A. Conditional mean equation
⎡−0.030 (0.010)⎤ ⎡ 0.003 (0.002) 0.001 (0.127) ⎤
⎢ ⎥ ⎢ ⎥
⎢−0.002 (0.866)⎥ ⎢−0.0001 (0.902) 0.0001 (0.923) ⎥
𝚽=⎢ ⎥; 𝝀 = ⎢ ⎥;
⎢−0.044 (0.035)⎥ ⎢ −0.001 (0.247) 0.002 (0.060) ⎥
⎢ ⎥ ⎢ ⎥
⎣ 0.023 (0.198) ⎦ ⎣ −0.003 (0.004) −0.0004 (0.717)⎦

⎡−0.070 (0.035) 0.078 (0.095) 0.037 (0.085) −0.128 (0.008)⎤ ⎡−0.036 (0.270) −0.054 (0.291) 0.016 (0.433) 0.031 (0.520)⎤
⎢ ⎥ ⎢ ⎥
⎢−0.026 (0.084) −0.064 (0.065) −0.022 (0.046) 0.043 (0.129) ⎥ ⎢−0.007 (0.650) 0.001 (0.968) −0.016 (0.173) 0.025 (0.339)⎥
𝚪1 = ⎢ ⎥; 𝚪 2 = ⎢ ⎥;
⎢−0.031 (0.266) 0.031 (0.488) −0.027 (0.436) 0.072 (0.149) ⎥ ⎢−0.071 (0.006) −0.030 (0.477) −0.092 (0.005) 0.043 (0.347)⎥
⎢ ⎥ ⎢ ⎥
⎣−0.052 (0.003) −0.015 (0.692) −0.009 (0.530) −0.008 (0.819)⎦ ⎣−0.043 (0.008) −0.066 (0.062) −0.035 (0.009) 0.059 (0.081)⎦

⎡ 0.010 (0.756) −0.051 (0.263) 0.001 (0.961) −0.005 (0.924)⎤ ⎡ 0.080 (0.556) 0.194 (0.173) 0.035 (0.592) −0.210 (0.221)⎤
⎢ ⎥ ⎢ ⎥
⎢−0.010 (0.500) −0.011 (0.745) −0.056 (0.000) 0.024 (0.427) ⎥ ⎢−0.050 (0.251) −0.308 (0.021) 0.146 (0.005) 0.158 (0.118) ⎥
𝚪3 = ⎢ ⎥; 𝚿 = ⎢ ⎥.
⎢−0.041 (0.104) 0.087 (0.078) −0.047 (0.111) −0.108 (0.026)⎥ ⎢−0.295 (0.011) 0.115 (0.555) 0.368 (0.032) 0.037 (0.858) ⎥
⎢ ⎥ ⎢ ⎥
⎣−0.043 (0.015) 0.080 (0.026) −0.053 (0.000) −0.017 (0.627)⎦ ⎣ 0.010 (0.858) −0.275 (0.185) 0.182 (0.000) −0.278 (0.041)⎦
B. Conditional variance-covariance structure
⎡ 0.004 (0.070) ⎤
⎢ ⎥
⎢−0.027 (0.083) −0.001 (0.676) ⎥
C=⎢ ⎥;
⎢−0.033 (0.000) −0.008 (0.000) 0.017 (0.000) ⎥
⎢ ⎥
⎣−0.002 (0.704) 0.005 (0.000) −0.002 (0.015) 0.020(0.000)⎦

⎡ 0.196 (0.000) 0.049 (0.006) −0.020 (0.601) 0.012 (0.707)⎤ ⎡ 0.972 (0.000) 0.036 (0.104) 0.220 (0.001) 0.085 (0.008) ⎤
⎢ ⎥ ⎢ ⎥
⎢−0.114 (0.005) 0.276 (0.000) −0.041 (0.461) 0.107 (0.086)⎥ ⎢ 0.093 (0.000) 1.011 (0.000) −0.023 (0.794) 0.094 (0.171) ⎥
A=⎢ ⎥; B = ⎢ ⎥.
⎢ 0.065 (0.000) −0.001 (0.964) 0.378 (0.000) 0.018 (0.349)⎥ ⎢−0.067 (0.137) −0.116 (0.000) −0.836 (0.000) 0.007 (0.741) ⎥
⎢ ⎥ ⎢ ⎥
⎣ 0.089 (0.081) 0.074 (0.036) 0.067 (0.252) 0.412 (0.000)⎦ ⎣−0.067 (0.243) −0.970 (0.000) −0.109 (0.002) −0.677 (0.000)⎦
Note: Sample period, weekly data: 1985:03:06–2016:03:10. Numbers in parentheses are p-values.

after the policy. A new spillover that emerges during this period is that a higher soybean price growth rate leads to a higher corn
price growth rate. Another new spillover is from soybean to sugar, and its impact is positive with 𝛾3,32 + ̃𝛾 3,32 = 0.138. By comparing
the mean spillover effects before and after the ethanol mandate, we find that the intertemporal correlations among the four markets
become weaker after the ethanol mandate.
The coefficients of the 𝚿 and 𝚿 + 𝚿 ̃ matrices in Tables 3 and 4 indicate how price volatility in one market affects its own
performance and that of the other markets, before and after the ethanol mandate, respectively. According to the coefficients of the
𝚿 matrix in Table 3, all markets react to their own volatility, except for the oil market. For example, the sugar price growth rate
increases as its volatility increases, whereas each of the soybean and corn price growth rates decreases as its volatility increases.
Regarding spillover effects, we find that an increase in the volatility of the oil price decreases the growth rate of the sugar price.
Moreover, the growth rates of the soybean and corn prices increase when there is an increase in sugar price volatility. After the
ethanol mandate, we find large volatility spillover effects from the soybean, sugar, and corn markets on the oil market (𝜓12 +
̃ 12 = −1.443, 𝜓13 + 𝜓
𝜓 ̃ 13 = 6.439, and 𝜓14 + 𝜓̃ 14 = 2.110), with soybean price volatility decreasing the growth rate of the oil
price, whereas sugar and corn price volatility increasing the growth rate of the oil price. We also find that soybean price volatility
decreases the growth rate of the sugar price, that corn price volatility increases the growth rate of the sugar price, and that sugar
price volatility increases the corn price growth rate, and the magnitude of this effect is larger after the ethanol mandate. Overall, we
find more GARCH-in-mean spillovers after the policy change.
Regarding the volatility linkages, all the ‘own-market’ coefficients in the A, B, A + A ̃, B + B
̃ matrices are statistically significant
and the estimates suggest a high degree of persistence. There is no spillover ARCH effect from the other markets to the sugar
and corn markets before the ethanol mandate, but we find statistically significant spillover ARCH effects after the change of the
policy. In particular, an unexpected shock in the oil, soybean, or corn market increases the volatility of the sugar market after the
implementation of the ethanol mandate, since 𝛼13 + 𝛼 ̃13 = −0.06 (with a p-value of 0.010) which implies the spillover ARCH effect
is (−0.06)2 , 𝛼23 + ̃
𝛼 23 = 0.319 (with a p-value of 0.000) which implies the spillover ARCH effect is (0.319)2 , and 𝛼43 + ̃ 𝛼 43 = −0.153
(with a p-value of 0.000) which implies the spillover ARCH effect is (−0.153)2 . Moreover, the spillover ARCH effect from the soybean
and sugar markets on the corn market emerged as well after the ethanol mandate. Regarding the spillover ARCH effects received by
the oil market, we find soybean and sugar price shocks increase the volatility of the oil market before the ethanol mandate. However,
a soybean price shock does not increase the volatility of the oil market after the ethanol mandate. There are some changes to the
spillover ARCH effects received by the soybean market as well. For example, soybean price volatility will increase if there are shocks
to the oil and corn markets before the ethanol mandate. It is found that soybean price volatility does not respond to an oil price
shock after the ethanol mandate. On the other hand, soybean price volatility will increase if there is a shock to the sugar market after
the ethanol mandate, since 𝛼 32 = − 0.001 (with a p-value of 0.964) and 𝛼32 + ̃ 𝛼 32 = 0.096 (with a p-value of 0.001).
We also find statistically significant spillover GARCH effects when the ethanol mandate is implemented. There is evidence
for volatility spillovers from the sugar market to the oil market, with 𝛽31 + 𝛽̃31 = −0.391 (with a p-value of 0.001). We also

5
 A. Serletis and L. Xu
Table 4
The four-variable VEC-GARCH-in-Mean BEKK(1,1,1) model, after the ethanol mandate.
A. Conditional mean equation
⎡−0.323 (0.000)⎤ ⎡ 0.001 (0.303) 0.0001 (0.922) ⎤
⎢ ⎥ ⎢ ⎥
⎢
̃ =⎢ 0.033 (0.460) ⎥ ⎢ 0.002 (0.054) 0.001 (0.136) ⎥
𝚽+𝚽 ⎥; 𝝀 + ̃
𝝀=⎢ ⎥;
⎢−0.286 (0.000)⎥ ⎢−0.001 (0.591) 0.006 (0.000) ⎥
⎢ ⎥ ⎢ ⎥
⎣−0.022 (0.394)⎦ ⎣−0.002 (0.077) −0.002 (0.017)⎦

⎡−0.056 (0.253) 0.053 (0.279) −0.051 (0.174) 0.041 (0.381)⎤ ⎡ 0.018 (0.699) 0.001 (0.977) 0.030 (0.480) 0.064 (0.110) ⎤
⎢ ⎥ ⎢ ⎥
̃ 1 = ⎢⎢ 0.027 (0.276)
𝚪1 + 𝚪
−0.020 (0.659) −0.047 (0.058) 0.053 (0.150)⎥
̃ 2 = ⎢⎢−0.017 (0.514)
⎥; 𝚪2 + 𝚪
0.029 (0.547) 0.004 (0.882) 0.060 (0.078) ⎥
⎥;
⎢−0.029 (0.514) −0.041 (0.482) −0.005 (0.918) 0.023 (0.618)⎥ ⎢−0.041 (0.298) −0.020 (0.746) 0.049 (0.302) 0.015 (0.745) ⎥
⎢ ⎥ ⎢ ⎥
⎣−0.066 (0.034) 0.136 (0.010) −0.029 (0.439) 0.004 (0.937)⎦ ⎣−0.037 (0.225) 0.017 (0.754) −0.028 (0.396) −0.016 (0.681)⎦

⎡−0.022 (0.641) 0.054 (0.284) −0.078 (0.069) 0.039 (0.286) ⎤ ⎡−0.262 (0.059) −1.443 (0.000) 6.439 (0.000) 2.110 (0.000)⎤
⎢ ⎥ ⎢ ⎥
̃ 3 = ⎢⎢−0.012 (0.594) −0.020 (0.664) 0.004 (0.893) 0.041 (0.275) ⎥
̃ = ⎢⎢ 0.000 (0.996) −0.159 (0.544) −1.186 (0.300) 0.878 (0.124)⎥
6

𝚪3 + 𝚪 ⎥; 𝚿 + 𝚿 ⎥.
⎢−0.022 (0.602) 0.138 (0.006) 0.024 (0.623) −0.082 (0.053)⎥ ⎢ 0.139 (0.257) −1.193 (0.000) 2.942 (0.002) 1.910 (0.011)⎥
⎢ ⎥ ⎢ ⎥
⎣−0.029 (0.339) 0.041 (0.498) 0.009 (0.807) 0.064 (0.187) ⎦ ⎣ 0.011 (0.903) −0.143 (0.599) 1.117 (0.050) 0.339 (0.308)⎦
B. Conditional variance-covariance structure
⎡ 0.0004 (0.900) ⎤
⎢ ⎥
̃ = ⎢⎢ ⎥
0.039 (0.487) 0.0003 (0.931)
C+C ⎥;
⎢−0.011 (0.003) 0.002 (0.317) 0.003 (0.259) ⎥
⎢ ⎥
⎣ 0.004 (0.791) 0.035 (0.039) 0.124 (0.106) 0.010(0.296)⎦

⎡ 0.279 (0.000) −0.011 (0.765) −0.060 (0.010) −0.008 (0.831)⎤ ⎡ 0.911 (0.000) −0.051 (0.016) −0.094 (0.338) 0.237 (0.000) ⎤
⎢ ⎥ ⎢ ⎥

Journal of Commodity Markets 15 (2019) 100068

̃ = ⎢⎢
0.252 (0.001) ⎥
̃ = ⎢⎢
−0.111 (0.119) 0.535 (0.000) 0.319 (0.000) 0.255 (0.000) 0.655 (0.000) 0.656 (0.000) 0.460 (0.000) ⎥
A+A ⎥; B + B ⎥.
⎢ 0.103 (0.036) 0.096 (0.001) −0.037 (0.074) 0.245 (0.000) ⎥ ⎢−0.391 (0.001) −0.204 (0.002) −0.939 (0.000) 0.697 (0.000) ⎥
⎢ ⎥ ⎢ ⎥
⎣−0.041 (0.374) −0.207 (0.000) −0.153 (0.000) −0.208 (0.000)⎦ ⎣−0.082 (0.478) 0.305 (0.000) −0.328 (0.000) −0.318 (0.000)⎦
Note: Sample period, weekly data: 1986:03:06–2016:03:10. Numbers in parentheses are p-values.
A. Serletis and L. Xu Journal of Commodity Markets 15 (2019) 100068

Table 5
Diagnostics and hypotheses tests.
A. Likelihood ratio test
Chi-squared statistics
Conventional VEC 1262.320 (0.000)
VEC GARCH-in-Mean 264.029 (0.000)

B. Residual diagnostics
Chi-squared statistics
Multivariate ARCH test 423.930 (0.197)
Multivariate serial correlation test 30.995 (0.999)

C. Hypotheses tests (tests before the ethanol mandate)

F statistics
No Granger causality from soybean, sugar, and corn prices to oil price 2.376 (0.006)
No Granger causality from oil, sugar, and corn prices to soybean price 2.756 (0.001)
No Granger causality from oil, soybean, and corn price to sugar price 2.679 (0.002)
No Granger causality from oil, soybean, and corn prices to corn price 5.179 (0.000)
No spillover ARCH effects 5.108 (0.000)
No spillover GARCH effects 150.170 (0.000)

D. Hypotheses tests (tests after the ethanol mandate)

F statistics
No Granger causality from soybean, sugar, and corn prices to oil price 2.052 (0.003)
No Granger causality from oil, sugar, and corn prices to soybean price 2.524 (0.000)
No Granger causality from oil, soybean, and corn price to sugar price 2.804 (0.000)
No Granger causality from oil, soybean, and corn prices to corn price 4.040 (0.000)
No spillover ARCH effects 9.274 (0.000)
No spillover GARCH effects 254.167 (0.000)
Note: Sample period, weekly data: 1986:03:06–2016:03:10. Numbers in parentheses are tail areas of tests.

find volatility spillovers running from the oil market to the soybean market with 𝛽12 + 𝛽̃12 = −0.051 (with a p-value of 0.016).
Moreover, the volatility spillovers running from the soybean and sugar markets to the corn market appear after the ethanol
mandate. In particular, the soybean and corn markets receive spillover GARCH effects from all the other markets after the
ethanol mandate. Overall, we find that the volatility spillovers across markets are enhanced when the ethanol mandate became
effective, suggesting that the policy has strengthened the linkages between the oil and the biofuel agricultural commodity
markets.
Our model is statistically justified by likelihood ratio tests and residual diagnostics. According to panel A of Table 5, our model
is preferred compared to a conventional VECM model that does not accommodate conditional heteroskedasticity. It is also pre-
ferred over its restricted version that does not include the break in the coefficients of the mean and variance equations. Our
model, is also further justified further by the residual diagnostics reported in Table 5. In particular, we calculate the standardized
residuals
𝜖j,t
zj,t = √
hjj,t

for j = o, b, s, and c, and report the results of a number of tests in Table 5. The multivariate ARCH test is performed following Hacker
and Hatemi-J (2005) who proposed a Lagrange multiplier test with the hypothesis that there is no ARCH effect left in the vector of
standardized residuals. Regarding autocorrelation between standardized residuals, we conduct the multivariate Q test proposed by
Hosking (1981). According to the results in panel B of Table 5, there is no evidence to support ARCH effects and serial correlation in
the vector of standardized residuals. Moreover, we conduct Granger (1969) causality tests, and according to the results in panels C
and D of Table 5, we can conclude that there is significant Granger causality among the oil and biofuel markets before and after the
ethanol mandate.

5. Conclusion

We have investigated mean and volatility spillovers between the oil market and three biofuel agricultural commodity markets —
the soybean, sugar, and corn markets — by estimating a four-variable vector error correction GARCH–in–Mean model with a BEKK
representation for the variance equation. We have also investigated for possible effects of the ethanol mandate by including a dummy
variable in both the conditional mean and variance equations. The four-variable VEC–GARCH–in–Mean BEKK analyzed, our focus
on both first- and second-moment linkages, and the incorporation of a structural break to capture the effects of the renewable
fuel policy all represent original contributions to the literature. We find that the crude oil market and the biofuel agricultural
commodity markets are tightly interconnected and that the ethanol mandate has strengthened their linkages in terms of volatility
spillovers.

7
A. Serletis and L. Xu Journal of Commodity Markets 15 (2019) 100068

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