Economic Modelling 102 (2021) 105552

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Economic Modelling
journal homepage: www.journals.elsevier.com/economic-modelling

Volatility spillovers between food and fuel markets: Do administrative

regulations affect the transmission?
Henry An ∗ , Feng Qiu, James Rude
Department of Resource Economics & Environmental Sociology, University of Alberta, Canada

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

JEL classification: The rapid growth of biofuel production has led to the food versus fuel dilemma, with studies showing that the
C58 use of crops as inputs drives up prices, volatility and volatility spillovers in food and fuel markets. Renewable
Q16 identification numbers (RINs) are fuel credits that track and enforce compliance with U.S. renewable energy
Q18
mandates, and may ameliorate price volatility disruptions and reduce spillovers. However, existing studies have
Q40
largely ignored the relationship between RINs and price volatility. Using weekly spot price data over the period
2008–2018, we examine the impact of RINs on the volatility and market interdependence between the corn,
Keywords: ethanol, and oil markets. Through an asymmetric multivariate GARCH model, we find that the RIN market
Biofuels
contributes to a reduction of volatility in the ethanol market, and also reduces volatility spillovers between corn
Ethanol
and ethanol markets. Lastly, RINs weaken the market interdependence between ethanol and corn and ethanol
Price volatility spillovers
Renewable identification numbers and oil.

1. Introduction
Agriculture has always depended on the petroleum industry for
inputs including fuel and fertilizer, but aggressive mandates for biofuel
use in petroleum refining have forged even stronger linkages between
the energy and agricultural commodities markets (Pal and Mitra, 2019).
Blending mandates, and other policy interventions, increased grain
demand resulting in tighter markets and increased price variability. An
extensive literature (e.g., Serra and Zilberman (2013) and Baek and Koo
(2014)) has emerged that attempts to explain biofuels driven food price
spikes, while more recently the literature has evolved to consider price
volatility (see deGorter et al. (2015)). Volatility hinders price discovery
and the resulting uncertainty complicates investment and production
decisions across related markets. Volatility spillovers between markets
further complicate decision making. Agents who ignore these interde-
pendencies face potentially even greater risks and the associated costs
of managing these risks. Just as volatility spillovers complicate deci-
sion making across markets, spillovers increase the interdependence of
policies across markets as policy makers promote objectives such as
reduced fossil fuel consumption. For instance, a system of Renewable
Identification Numbers (RINs) track the production and use of renew-
able fuels that are required to be blended with fossil fuels under the
United States (U.S.) Renewable Fuel Standard (RFS). Like other envi-
ronmental obligations with tradable markets, RINs are bought and sold
in a process that creates an incentive to minimize compliance costs for
the RFS. Although RINs are intended to facilitate implementation of
blending requirements, rigidities in the market for RINs can result in
volatile RIN prices with spillovers to other markets.
Numerous studies have examined the extent to which price volatility
is transmitted between the energy and agriculture markets. The study
of volatility transmission is important because it shows the extent to
which systematic variability in the price of an agricultural commod-
ity, for example, contributes to the variability in the price of an energy
commodity. From this literature, a subset of studies that focused on
the U.S. found spillovers from corn to ethanol. Trujillo-Barrera et al.
(2012) and Gardebroek and Hernandez (2013) both found one-way
volatility spillovers from the corn to ethanol markets. Trujillo-Barrera
et al. (2012) also found spillovers from the oil market to the corn and
ethanol markets. More recently, using different frequency datasets (i.e.,
daily, weekly and monthly), Saghaian et al. (2018) found volatility
spillovers from corn to ethanol regardless of the data frequency used,
while volatility spillovers from ethanol to corn were only found using
the dataset of daily prices. They also found linkages across the differ-
ent markets as well as asymmetric volatility spillover effects, but these
results were dependent on the data frequency. While these three studies

∗ Corresponding author.
E-mail addresses: henry.an@ualberta.ca (H. An), feng.qiu@ualberta.ca (F. Qiu), james.rude@ualberta.ca (J. Rude).

https://doi.org/10.1016/j.econmod.2021.105552
Received 25 September 2020; Received in revised form 14 May 2021; Accepted 16 May 2021
Available online 27 May 2021
0264-9993/© 2021 Elsevier B.V. All rights reserved.
H. An, F. Qiu and J. Rude
detected volatility spillovers between sectors and identified the direc-
tion of the spillovers, they have one important gap in that they did not
account for the role of RINs on the interdependence of ethanol, corn
and oil markets.
The RIN market plays an important role linking fossil fuel blenders
with ethanol producers because the RINs are traded across within-
2-year time frames and across firms, thereby potentially smoothing
RIN prices. With binding mandates, the RIN price reflects the dif-
ference between the marginal cost of ethanol production (i.e., the
observed market price) and the willingness of blenders to pay (i.e.,
the market value) for the ethanol (Pouliot and Babcock, 2016). Conse-
quently, it is possible that the RIN market reduces volatility spillovers
between ethanol and crude oil in the presence of binding ethanol
mandates. Alternatively, there is a view that the RIN market actually
increases price volatility and that it increases the gap between the
marginal cost price of ethanol and the willingness of blenders to pay
for the ethanol (American Petroleum Institute, 2019). Furthermore, the
increased ethanol price volatility increases the possibility for cross mar-
ket volatility spillovers. Existing studies that have examined the rela-
tionship among ethanol, corn and oil markets use the observed market
price of ethanol, but it is likely that this data does not represent the
true relationship between the three markets because it does not cap-
ture the impact of the RIN price and adjustments to the RFS. This raises
the following question: does the RIN market smooth ethanol prices and
therefore reduce volatility within and across energy markets or does
it exacerbate volatility within and across markets? It is important to
investigate the role of the RIN market to understand how it has affected
these three markets, and to examine whether this policy has led to any
changes in these underlying relationships. This can provide insight into
what may happen if there is a change in energy policy leading to the
removal of this compliance mechanism.
The main objective of this study is to consider the effect of RINs on
the market interdependence between the ethanol, corn and oil markets
by estimating price volatility and volatility spillovers between these
markets in the presence and absence of RINs. Our empirical approach
consists of three steps. First, we test for the presence of a long-run rela-
tionship between the three markets using standard cointegration regres-
sion methods. Second, we characterize the short-run price dynamics
and estimate the magnitude of volatility spillovers using a multivariate
GARCH model that allows for spillover and asymmetric shock effects.
Third, we use the GARCH results to examine the interdependence of the
three markets. In all three steps, we consider the relationships using the
market price (including the RIN price) and market value (excluding the
RIN price) of ethanol to examine the role of the RIN market on volatility
spillovers between the ethanol, corn and oil markets and the linkages
between them. By considering both the market price and market value
of ethanol, we can examine how compliance with U.S. energy policy has
affected the nature of price volatility transmission across these markets.
The remainder of this paper is structured as follows. Section 2 pro-
vides some background on U.S. energy policy and the RIN market, a
brief review of the relevant literature, and a simple conceptual model
of how the RIN price is generated. Section 3 describes the empirical
strategy and data that will be used. Section 4 presents the results and
discussion, and section 5 concludes.
2. Background
In 2005, the U.S. produced 4 billion gallons of ethanol, which used
14% of the nation’s corn crop. The Energy Policy Act of 2005 introduced
the RFS, which specified biofuel mandates with volumetric targets. By
2014, the U.S. used 37% of the nation’s corn crop to produce just over
14 billion gallons of ethanol. The resulting surge in the demand for
corn led to a simultaneous increase in the price of corn; Carter et al.
(2017) estimated that U.S. biofuel policies resulted in a 30% increase
in corn prices from 2006 to 2014. The share of corn used for ethanol
between 2014 and 2019 has remained steady at between 37 and 38%
2
Economic Modelling 102 (2021) 105552
(USDA-ERS, 2019). The growth of the sector has primarily been driven
by policy measures such as blending mandates and, to a lesser extent,
more traditional production subsidies and import tariffs.
U.S. policy has played an important role in encouraging the pro-
duction of corn as the primary feedstock for ethanol. The combination
of import tariffs, blenders fuel tax credits and laws designed to reduce
pollution and provide incentives to use cleaner and renewable fuels
has greatly benefited the biofuel industry. In 2005, the U.S. Congress
enacted the Energy Policy Act (EPAct, P.L. 109-58) that introduced
the RFS program. The initial RFS (RFS1) included legislation that man-
dated a minimum 4 billion gallons of renewable fuels be added to the
gasoline supply in 2006 and 7.5 billion gallons by 2012. This original
mandate was changed two years later under the Energy Independence
and Security Act of 2007 (EISA, P.L. 110–140), resulting in an aug-
mented RFS (RFS2) that required the use of 9 billion gallons of renew-
able fuels in 2008, 12 billion gallons in 2012, and 36 billion gallons by
2022. The 2022 mandate included some additional restrictions, such as
a minimum of 16 billion gallons coming from cellulosic biofuels and a
maximum of 15 billion gallons coming from corn-starch-based ethanol
(Schnepf and Yacobucci, 2013).
While the RFS requires more biofuel to be used each year, the
amount of ethanol that can actually be added to gasoline may not be
able to increase as rapidly. This is because ethanol is currently used
in two different blends in the U.S.: E10 and E85.1 E10 gasoline con-
tains up to 10% ethanol by volume and is the overwhelmingly dom-
inant type of gasoline used today. E85 gasoline contains between 51
and 83% ethanol and represents a very small share due to low demand
(few flex-fuel vehicles) and low supply (approximately 3000 gas sta-
tions in the U.S. offer E85).2 Since the volume of E85 is still small, the
maximum amount of ethanol that can be blended into gasoline is effec-
tively 10% of total gasoline consumption. This physical limit is known
as the “blend wall” and there is evidence to suggest that it was reached
in 2013.3
These difficulties associated with complying with the RFS mandates
have generated interested in the role of the RIN market. A RIN is a
serial number that is created and assigned to a gallon of biofuel (e.g.,
ethanol) when it is produced or imported. RINs can be purchased and
sold, and are used to track the production, use and trade of a unit of
biofuel. As described by Pouliot and Babcock (2016), RINs serve two
main purposes: (1) they show compliance with the RFS; and (2) their
price creates an incentive to minimize compliance costs. In practice, the
price of a RIN acts as a subsidy to ethanol producers (who generate the
RINs) and a tax to blenders and refiners (who are the obligated parties).
Typically, ethanol producers will sell ethanol to a blender at a price pe
equal to the value of ethanol on the fuel market (pv ) and the value of
the corresponding RIN (𝜌), or pe = pv + 𝜌. At this point, the RIN is
now detached and tradable on the RIN market (Pouliot and Babcock,
2016).
The Environmental Protection Agency (EPA) uses RINs to track RFS
compliance, but the problems of binding mandates and blend limits
mean that the RIN market plays an important role in inducing greater
ethanol production and blending. We motivate the importance of con-
1
There is also the potential for E15, which is gasoline that contains 15%
ethanol by volume and can be used by existing vehicles. Zhang et al. (2010)
consider the case where the EPA relaxes the limit and allows E15 and show
that it can actually lead to higher demand for gasoline.
2
Even if more E85 gasoline were available, it would have to be priced signif-
icantly lower than E10 gasoline for there to be a large increase in consumption
(Pouliot and Babcock, 2017).
3
Christopher Grundler, head of the EPA’s Transportation and Air Quality
Office, stated that the RFS mandate was no longer attainable due to lower
than predicted gasoline consumption and the technical constraint known as
the blend wall on December 11, 2013. See http://www.epa.gov/ocir/hearings/
testimony/113_2013_2014/2013_1210_grundler_renewable_fuel.pdf for more
information.
H. An, F. Qiu and J. Rude
Fig. 1. Formation of RIN price. Notes: When the RFS mandate is non-binding
(M), the RIN price is zero or near zero. When the RFS mandate is binding
(M), the price that firms require from blenders (Pe ) to produce more ethanol
is greater than the price of ethanol that firms are willing to pay to blend into
gasoline (Pv ), where the difference is equal to the RIN price.
sidering the RIN price in the relationship between the ethanol, corn
and oil markets with a simple model adapted from Stock (2018). Con-
sider the supply and demand for ethanol in Fig. 1. Here, we depict
the market for ethanol where the y-axis is the price in USD per gallon
and the x-axis is the quantity of ethanol. In the absence of any RFS
mandates, the point at which supply equals demand yields P∗ and Q∗ .
However, the RFS requires that a certain amount of ethanol be used. If
the mandate is set below the equilibrium point, at M, then the mandate
is non-binding, meaning the equilibrium price and quantity remain the
same, and the RIN price is zero or very close to zero. In this situation,
the price of ethanol depends on both the price of corn and the price of
gasoline. However, if the mandate is binding such that it is at a point
that exceeds Q∗ , or M, then this puts us in a situation where the sup-
ply exceeds demand. Now, the price of ethanol is Pe but the market’s
willingness to pay (or value) of ethanol is Pv , as this is how the demand
side values this quantity of ethanol. The difference between Pe and Pv
is the RIN price. Here, the price of ethanol depends on the price of
corn but should be less dependent on the price of gasoline as ethanol
supply and demand cannot fully adjust to the equilibrium that would
occur in the absence of the mandate. The wedge occurs because pro-
ducers of ethanol need a high enough price to induce production, but
the consumers of ethanol need a low ethanol price (i.e., excluding the
RIN price) to induce them to demand the higher volume (Whistance
and Thompson, 2014).
In addition, while ethanol and crude oil are typically considered
to be substitutes, the relationship can switch to a complementary one
at different margins, such as the blend wall (Debnath et al., 2017).
Whistance et al. (2016) find some evidence of complementary behavior
between biofuel and petroleum products in their study, and note that a
complementary relationship between ethanol and crude oil also means
that, a priori, the prices of the two goods do not necessarily move in
the same direction in response to all shocks, as a negative shock to the
supply of either good is likely to increase the price of that good but
decrease the price of the complementary good.
The literature has only recently started to recognize the importance
of accounting for the RIN market. Papers by Pouliot and Babcock (2016)
and Korting and Just (2017) investigated the role that the RIN market
has on meeting the mandates set by the RFS. More recently, Lade et
al. (2018) examined how major policy events in the past decade led to
significant changes in expected future mandates and RIN prices. To the
best of our knowledge, the only study that considers the role of RINs
in price transmission is by Whistance et al. (2016). They looked at how
the inclusion of RIN price data affects price transmission among the
3
Economic Modelling 102 (2021) 105552
biofuel (ethanol and biodiesel), petroleum (gasoline, diesel and crude
oil) and agricultural (corn, sugar and soybean) markets. Assuming that
high (low) RIN prices represent the periods in which biofuel man-
dates are binding (non-binding), they test for differences in the rela-
tionships between the different markets under different regimes. They
generally did not find significant differences between binding and non-
binding regimes, but found some evidence that RIN prices do matter.
Our paper builds on this study by examining how the RIN price affects
price volatility and volatility spillovers across the ethanol, corn and oil
markets, which is to understanding how a policy designed to ensure
compliance with the RFS has led to any changes in these underlying
relationships.
The main value of the RIN reflects the extent to which the associated
mandates are binding on the blenders. As it becomes more difficult to
meet the mandate, the blenders have to bid higher prices to encourage
producers to supply ethanol and the associated price gap – RIN price
– increases. One outcome of higher RIN prices is lower prices for E85,
as higher RIN prices mean the net cost of ethanol being blended into
motor fuel is lower while the gasoline portion of the cost is higher. Since
E85 has a higher share of ethanol than E10, the cost of producing E85
decreases as RIN prices increase (Whistance et al., 2016). Gasoline pro-
ducers, not surprisingly, would like to lower the price of RINs and can
do so by increasing their supply. They can achieve this by expanding the
consumption of E85, and the entire RIN market provides the incentive
to invest in E85 infrastructure (Pouliot and Babcock, 2017). However,
the extent to which higher RIN prices can increase the demand for E85
depends on several factors, including how much of the RIN price is
passed through to E85 wholesalers and retailers leading to lower con-
sumer ethanol prices, or whether the RIN price is treated as a tax or
subsidy by integrated firms that both blend and refine (Pouliot and
Babcock, 2017).
The discussion above presents a simplified description of the key
relationships between markets determining volatility patterns. Based on
Fig. 1 and the nature of RINs, we hypothesize that: (1) a high RIN price
(or binding mandate) weakens the relationship between ethanol and
oil; and (2) subtracting the RIN price from the price of ethanol should
increase price volatility spillovers. The main contribution of our paper
is to show that it is important to consider the effect of the RIN market
when evaluating the relationship between the food and fuel markets.
3. Empirical approach and data
We test the predictions of our conceptual model and investigate the
volatility spillovers and dynamic correlations among the three markets
of interest by estimating an asymmetric vector error correction (VEC)
BEKK-GARCH model. We discuss this model in greater detail next, fol-
lowed by a brief description of the data and some preliminary analysis
to examine the time-series properties of our data.
3.1. Econometric model
The BEKK-GARCH model (Engle and Kroner, 1995) is a popular
approach for modeling conditional volatility for several reasons. First,
it has an advantage over other GARCH models in that it allows the
econometrician to model volatility spillovers across specific markets.
This feature is important in our empirical setting as we consider three
distinct markets. Second, the variance-covariance matrix is constrained
by design to be positive definite for each time period. Finally, the asym-
metric version of the model (Grier et al., 2004) allows volatility to
respond differently to positive and negative price changes, which pro-
vides the flexibility needed to reflect the asymmetric responses that
have been observed in the commodity markets (FAO, 2010). The main
disadvantages of the BEKK-GARCH model are that it is not parsimo-
nious and has a high number of unknown parameters, which leads
to large computational requirements making very difficult to use for
series with greater than three variables (Bauwens et al., 2006). Further-
H. An, F. Qiu and J. Rude Economic Modelling 102 (2021) 105552

more, although it is possible to derive time-varying volatility, the BEKK- Table 1

GARCH model is unable to estimate time-varying volatility spillovers. Summary statistics.
To estimate the BEKK-GARCH model, we simultaneously estimate a
Ethanol Ethanol-RIN Corn Oil
conditional means model and a conditional variances model. The con-
Weekly prices (100 ∗ ln Pt )
ditional means model estimates price adjustments in one market as a
function of own lagged price adjustments, lagged price adjustments that Mean 64.368 36.978 149.829 52.736
Std. Dev. 23.846 47.833 28.953 34.442
occur in a different market, an error correction term ECT, an indicator
Skewness 0.241 −0.557 0.608 −0.367
variable Icointeg that equals 1 when the markets are cointegrated, and an Kurtosis −1.211 −0.791 −1.133 −0.894
error term. The model can be expressed as: ADF test for unit root −1.929 −1.798 −2.178 −2.218

Δ ln(Pt ) = 𝛾 ECTt−1 Icointeg + Δ ln(Pt−p )𝜃p + 𝜀t (1) Weekly returns (100 ∗ [ ln(Pt ) − ln(Pt −1 )])
Mean −0.111 −0.134 −0.088 −0.085
where ECT is the residual from the estimated long-run relationship 4 Std. Dev. 5.227 7.873 3.789 5.288
and 𝜀t ∼ (0, Ht ). Skewness −0.432 −0.211 −0.745 −0.766
Simultaneously, we estimate a conditional volatility model with the Kurtosis 6.388 4.176 5.730 5.717
ADF test for unit root −8.951 −8.023 −7.053 −9.570
following form:
Notes: ∗ p < 0.10, ∗∗ p < 0.05, ∗∗∗ p < 0.01.
Ht = K ′ K + A′ 𝜀t −1 𝜀′t −1 A + B′ Ht −1 B + C′ 𝜉t −1 𝜉t′−1 C, (2) The critical values of the ADF test at 1%, 5% and 10% are −3.440, −2.865
and −2.569, respectively.
In the mean equation (i.e., Equation (1)), Δ ln(Pt ) is a 3 × 1 price
The data are from April 2008 to August 2018.
change vector for the three markets; Δ ln(Pt −p ) is a 3x3p lagged price
changes matrix, and 𝜃 p is a 3px1 coefficient vector. The error term 𝜀t −1
comprises the product of the conditional standard deviation and ran- The estimation of the asymmetric VEC-BEKK-GARCH model
dom noise. Equation (2) models the conditional variance or volatility involves the following procedure. First, we estimate the mean compo-
as a function of lagged (both own and cross) shocks and lagged (both nent (Eq. (1)) as a trivariate VAR or VEC model. Lag structures for the
own and cross) volatility. The dependent variable Ht is the conditional mean equation are selected based on the Akaike Information Criterion.
variance-covariance matrix, and K, A, B, and C are parameter matrices After estimating the VAR or VEC model, insignificant coefficients are
that are defined as follows: eliminated, and then the conditional mean model is re-estimated simul-
⎡h11 h12 h13 ⎤ ⎡k11 k12 k13 ⎤ taneously together with the conditional variance component; that is,
⎢ ⎥ ⎢ ⎥ Eqs. (1) and (2) are estimated as a VAR/VEC-BEKK-GARCH system.5
Ht = ⎢h21 h22 h23 ⎥ K=⎢ 0 k22 k23 ⎥
⎢ ⎥ ⎢ ⎥
⎣h31 h32 h33 ⎦ ⎣ 0 0 k33 ⎦ 3.2. Data and summary statistics

⎡a11 a12 a13 ⎤ ⎡b11 b12 b13 ⎤ We use weekly price data for the period April 2008 to August 2018,
⎢ ⎥ ⎢ ⎥
A = ⎢a21 a22 a23 ⎥ B = ⎢b21 b22 b23 ⎥ (3) as the data on RIN prices do not go back any further. For ethanol, we
⎢ ⎥ ⎢ ⎥ use the spot Chicago price in USD per gallon; and for corn, we use
⎣a31 a32 a33 ⎦ ⎣b31 b32 b33 ⎦
the Central Illinois spot price for No. 2 yellow corn. We use the West
⎡c11 c12 c13 ⎤ Texas Intermediate spot price in USD per barrel for crude oil. Lastly,
⎢ ⎥ the weekly D6 RIN prices in USD per gallon are from the EPA. For the
C = ⎢c21 c22 c23 ⎥
⎢ ⎥ empirical analyses, we take the logarithm of the prices and multiply by
⎣c31 c32 c33 ⎦ 100. Fig. 2 plots the four price and price change (commonly referred to
as returns) time series, where Ethanol 1 is the spot price of ethanol, or
where hij is the conditional covariance (or variance when i = j) and
the unadjusted ethanol price; and Ethanol 2 is the spot price of ethanol
the subscripts denote the market (1 = ethanol, 2 = corn, and 3 = oil).
less the D6 RIN price, or the adjusted ethanol price. We define price to
𝜉 t−1 is a variable (a 3 × 1 vector) that allows for asymmetry where
be 100∗ ln Pt and we define returns to be 100 ∗ [ ln(Pt ) − ln(Pt −1 )].
𝜉 t−1 = I[𝜀t−1 ≤ 0] ◦ 𝜀t−1 . Here, I[•] is an indicator function and the
The summary statistics of the price and returns data are presented
operator ◦ denotes the Hadamard product.
in Table 1. Prior to model estimation, we check the stationarity of the
The first term on the right hand side is a constant represented by
series using the augmented Dickey-Fuller (ADF) test (Dickey and Fuller,
the parameter matrix K. The coefficients in A and C both represent
1979). Results show that the ADF tests fail to reject the null hypothesis
own-volatility and volatility spillovers caused by market shocks. Specif-
of the presence of a unit root for the price series, and reject the unit root
ically, the off-diagonal elements aij and cij (i ≠ j) represent the spillover
null hypothesis for the returns. We thus conclude that the price series
effects from market i to market j. In addition, the coefficients in C cap-
are all I(1), and we further investigate the cointegrating relationships.
ture the asymmetric effects due to negative price shocks. The coeffi-
Before estimating the mean equations, we examine whether or
cients in B capture the persistence of own-conditional volatilities (bii )
not there is a long-run cointegrating relationship between any pair
and volatility spillovers (bij where i ≠ j) from other markets. To calcu-
or triple of markets. A Johansen trace test is conducted on pair-wise
late the full impact of the market conditional variances, we perform
I(1) logged prices to detect the existence of any long-run price rela-
matrix multiplication of Eq. (2). We estimate the parameters in Equa-
tionships. Given the identification of cointegration, the cointegrating
tions (1) and (2) simultaneously using the quasi-maximum likelihood
parameters are estimated using ordinary least squares, and the resid-
method. The dynamic conditional correlation between two markets are
uals are then derived and used as error correction terms in the condi-
then estimated by
tional mean equations following Engle and Granger’s two-step approach
h1,2,t
𝜌= √ √
h1,1,t h2,2,t 5
Elimination of insignificant coefficients is a common approach in time series
econometrics (see for example van Dijk et al., 2002). The primary reason for
excluding the insignificant variables is for model parsimony and to ensure
convergence. The large number of lags substantially reduces the degree of
4
Assuming a long-run relationship of the form peth
t
= 𝛼 + 𝛽 poil
t
+ zt , the resid- freedoms, and violates the parsimony principle. As a result, we eliminate the
ual, or ECTt −1 , can be expressed as ECTt −1 = zt −1 = peth
t −1
𝛼 + 𝛽̂poil
− (̂ t −1
). insignificant lags after estimating the VEC(5) models.

4
H. An, F. Qiu and J. Rude
Fig. 2. Plot of price and price change series.
(Engle and Granger, 1987). The Johansen trace test results as well as
the estimated cointegrating relationship results are summarized in
Appendix A in table A.1. The results show that ethanol and oil prices
are cointegrated and remain cointegrated even after subtracting the RIN
price, though the exact nature of the cointegrating relationship differs.
However, we find that (i) ethanol (both adjusted and unadjusted) and
corn prices and (ii) oil and corn prices display no long run cointegrating
relationship. These findings differ from most of the existing literature
on price transmission and market integration between biofuel and food
markets, which often finds a cointegrating relationship between corn
and ethanol (Trujillo-Barrera et al., 2012; Saghaian et al., 2018) as well
as between corn and oil (e.g., Wu et al., 2011; Saghaian et al., 2018)
in U.S. markets. However, Whistance et al. (2016) find mixed results
5
Economic Modelling 102 (2021) 105552
with respect to the cointegration of several biofuel and feedstock prices
– including corn and oil – depending the on the nature of mandate
regime. They hypothesize that the absence of a cointegrating relation-
ship is an indication that the goods are not strong substitutes. Next, we
discuss our main empirical findings.
4. Results
The empirical estimation yields three sets of results each for the
unadjusted market price of ethanol and the adjusted (RIN-less) mar-
ket value of ethanol: relations between mean returns for ethanol, corn,
and oil; estimates of volatility spillovers between the three markets;
and plots of estimated return volatility and the conditional correlations
H. An, F. Qiu and J. Rude Economic Modelling 102 (2021) 105552

Table 2 Table 3
Conditional mean estimates between price changes: Ethanol. Conditional mean estimates between price changes: Ethanol -
Ethanol Corn Oil
RIN.
(i = 1) (i = 2) (i = 2) Ethanol - RIN Corn Oil
ECTethanol&oil −0.020∗ – 0.019∗ (i = 1) (i = 2) (i = 2)
(0.011) (0.010) ECTethanol&oil −0.017∗∗ – 0.005
Δpethanol
t −4
−0.040 – – (0.007) (0.005)
(0.038) Δpethanol −0.038 – –
t −5
Δpethanol
t −5
−0.043 – – (0.035)
(0.034) Δpethanol
t −8
−0.013 – –
Δpethanol
t −7
– 0.018 – (0.031)
(0.025) Δpethanol
t −10
−0.067∗ – –
Δpethanol
t −8
−0.005 – (0.033)
(0.034) Δpcorn – 0.059∗ –
t −1
Δpethanol
t −10
−0.091∗∗∗ – – (0.035)
(0.034) Δpcorn – – 0.068
t −2
Δpcorn
t −1
0.142∗∗ ∗ 0.094∗ – (0.044)
(0.039) (0.038) Δpcorn – −0.061∗ −0.076∗
t −4
Δpcorn
t −2
0.070∗ – 0.082∗ (0.033) (0.046)
(0.038) (0.044) Δpcorn
t −6
−0.011 – –
Δpcorn
t −4
– – −0.050 (0.048)
(0.048) Δpcorn
t −8
– 0.099∗∗∗ –
Δpcorn
t −8
0.035 0.114∗∗∗ – (0.033)
(0.041) (0.035) Δpcorn – – 0.011
t −9
Δpoil
t −2
– −0.024 – (0.040)
(0.025) Δpoil – −0.039∗ –
t −2
Δpoil
t −6
– – 0.066∗ (0.024)
(0.039) Δpoil 0.070∗ – –
t −3
Δpoil
t −8
– – 0.114∗∗∗ (0.035)
(0.039) Δpoil
t −4
0.038 – 0.029
(0.034) (0.040)
Notes: Standard errors in parenthesis where ∗ p < 0.10, ∗∗
Δpoil – – 0.052
p < 0.05, ∗∗∗ p < 0.01. t −6
(0.039)
Order of integration is indicated by i = n. Δpoil – – 0.117∗∗ ∗
t −8
(0.038)
Δpoil
t −9
– −0.030 –
of returns. These results allow us to examine the interdependence and (0.024)

volatility transmission and the role of RINs. More specifically, these esti- Notes: Standard errors in parenthesis where ∗ p < 0.10, ∗∗

mates allow us to evaluate if the degree of interdependence between p < 0.05, ∗∗∗ p < 0.01.
these markets differs when we factor in RIN prices. We discuss these Order of integration is indicated by i = n.
empirical results in greater detail in the following sub-sections.

long run equilibria. The adjusted ethanol market responds to deviations,

4.1. Mean equation results
with 1.7% of the disequilibrium corrected by the adjusted ethanol mar-
ket in the following week. However, we find a small and statistically
The estimated parameters for the mean equations, which repre-
insignificant ECT coefficient on the oil regression suggesting a weak or
sent short-run price dynamics, for the unadjusted price of ethanol
null response. The results for the corn market remain qualitatively simi-
are presented in Table 2. After removing variables with insignificant
lar, with corn returns again reacting to lagged own returns but showing
effects from the original VEC model specification, the reduced trivari-
no reaction to changes in the oil and ethanol markets.
ate model is re-estimated together with the variance/covariance spec-
ification using the significant lags from the previous step. The results
4.2. Volatility equation results
show that ethanol and oil market adjustments both respond to lagged
corn and own returns. The statistically significant ECT coefficient on
The estimates of the conditional variance/covariance equations are
the ethanol regression suggests that ethanol returns respond to devi-
reported in Tables 4 and 5 using ethanol and adjusted ethanol prices,
ations from its long run equilibrium relationship with the oil market.
respectively.6 The diagonal elements of the A and C matrices capture
In particular, 2.0% of the disequilibrium is corrected by the ethanol
own-volatilities resulting from lagged innovations (i.e., market shocks).
market in the following week. Oil returns also respond to deviations
Matrix A accounts for the ARCH effects, while matrix C accounts for
from the equilibrium, with the speed of adjustment being marginally
asymmetric responses to negative and positive shocks. Overall, the
slower (1.9%) than in the ethanol market. Together, these results sug-
results using the unadjusted ethanol price (Table 4) show significant
gest that both the ethanol and oil markets respond to deviations. The
own volatility effects in the ethanol and corn markets (a11 and a22 ,
results also show corn returns respond to lagged own returns but do
respectively) while the oil market volatility has a greater response
not react to changes in the oil and ethanol markets, which indicates
to negative price shocks (c33 ). This result is consistent with both the
that the relationship between corn and ethanol is unidirectional from
energy and agriculture volatility literature (Rahman and Serletis, 2012;
corn to ethanol. This result is consistent with the price transmission lit-
Salisu and Oloko, 2015). The off-diagonal elements (aij and cij ) measure
erature where studies find evidence of spillovers only from the input to
shock spillovers from market i to market j. We find statistically signifi-
output markets (e.g., Gardebroek and Hernandez, 2013).
cant spillovers occurring from the oil market to the corn market (a32 ).
Table 3 presents another set of conditional mean estimates except
this time we use the adjusted price of ethanol, or the price of ethanol
less the RIN price. The results are largely similar but there are important 6
We also conducted the multivariate Ljung-Box portmanteau (Q) test and the
differences. While these results also show that adjusted ethanol and oil multivariate ARCH-LM test for autocorrelation and heteroskedasticity, respec-
market adjustments both respond to lagged corn and own returns, we tively. In both cases, we cannot reject the null hypothesis, which suggests that
find differences in the two markets’ response to deviations from their our model specification is appropriate.

6
H. An, F. Qiu and J. Rude Economic Modelling 102 (2021) 105552

Table 4 Table 5
Results from asymmetric t-BEKK GARCH model: Ethanol. Results from asymmetric t-BEKK GARCH model: Ethanol - RIN.
Coefficient Standard error Spillovers Coefficient Standard error Spillovers
k11 0.811∗∗ ∗ 0.230 k11 1.189∗∗∗ 0.225
k12 0.667∗ 0.361 k12 0.140 0.135
k13 −0.521∗ 0.288 k13 −0.073 0.183
k22 0.609∗∗ 0.244 k22 0.383∗∗∗ 0.025
k23 −0.921∗∗∗ 0.273 k23 −0.856∗∗∗ 0.036
k33 −0.000 0.834 k33 0.000 0.368
a11 0.290∗∗ ∗ 0.052 a11 0.557∗∗∗ 0.035
a12 −0.001 0.023 a12 −0.010 0.007
a13 0.032 0.030 a13 0.008 0.013
a21 −0.047 0.056 a21 −0.304∗∗∗ 0.088 corn to ethanol
a22 0.125∗∗ ∗ 0.047 a22 0.037 0.029
a23 −0.035 0.053 a23 0.032 0.042
a31 0.036 0.036 a31 0.083∗ 0.044 oil to ethanol
a32 0.070∗ 0.037 oil to corn a32 0.049∗∗∗ 0.006 oil to corn
a33 0.067 0.062 a33 0.077∗∗ 0.030
b11 0.939∗∗ ∗ 0.021 b11 0.837∗∗∗ 0.014
b12 −0.002 0.009 b12 0.004∗∗∗ 0.001 ethanol to corn
b13 0.000 0.014 b13 0.001 0.004
b21 −0.040 0.034 b21 0.060∗∗∗ 0.016 corn to ethanol
b22 0.939∗∗ ∗ 0.030 b22 0.984∗∗∗ 0.002
b23 0.067∗ 0.035 corn to oil b23 0.022∗∗∗ 0.001 corn to oil
b31 0.029 0.021 b31 0.012 0.014
b32 0.031 0.020 b32 0.010∗∗∗ 0.001 oil to corn
b33 0.923∗∗ ∗ 0.026 b33 0.944∗∗∗ 0.006
c11 −0.033 0.082 c11 −0.099 0.083
c12 0.002 0.029 c12 −0.003 0.014
c13 −0.014 0.041 c13 −0.001 0.029
c21 0.163∗∗ 0.073 asym: corn to ethanol c21 −0.202∗∗ 0.091 asym: corn to ethanol
c22 0.055 0.059 c22 0.033 0.032
c23 −0.042 0.057 c23 −0.016 0.049
c31 −0.083∗ 0.04 asym: oil to ethanol c31 0.044 0.046
c32 −0.047 0.046 c32 −0.013 0.017
c33 0.377∗∗ ∗ 0.066 asym: oil c33 0.341∗∗∗ 0.029 asym: oil
Shape (𝜈 ) 6.622∗∗ ∗ 0.839 Shape (𝜈 ) 6.597∗∗∗ 0.819

Notes: In the parentheses, 1 = ethanol, 2 = corn and 3 = crude oil. Notes: In the parentheses, 1 = ethanol, 2 = corn and 3 = crude oil.
Stars denote significance where ∗ p < 0.10, ∗∗ p < 0.05, ∗∗∗ p < 0.01. Stars denote significance where ∗ p < 0.10, ∗∗ p < 0.05, ∗∗∗ p < 0.01.
Results from multivariate Q and ARCH tests indicate no autocorre-
lation or heteroskedasticity, respectively.

corn market (a23 ) is present as well. We also find evidence of asym-

In addition, we find evidence of asymmetric volatility spillover effects
from the corn market to the ethanol market (c21 ) and from the oil mar-
ket to the ethanol market (c31 ). This suggests that the negative price
shocks in the corn and oil markets lead to greater volatility spillovers
in the ethanol market.
Matrix B captures volatility persistence, with the diagonal bii coef-
ficients capturing own volatility persistence. All of the diagonal persis-
tence parameters are statistically significant. Also, in each case the bii
coefficient is larger than the aii or cii coefficients indicating that own
past volatility is more important than recent market shocks. This is
indicative of the presence of strong own GARCH effects. The bij s mea-
sure the persistence of volatility spillovers from market i to market j,
and we only find evidence of persistence spillover effects flowing from
corn to oil (b23 ).
Consistent with Trujillo-Barrera et al. (2012) and Saghaian et al.
(2018), the results of the multivariate BEKK-GARCH model suggest that
there are statistically significant volatility spillovers between the corn
and ethanol markets and between the oil and ethanol markets. Further,
we find evidence of asymmetry in that negative price shocks in both the
corn and oil markets lead to greater volatility spillovers in the ethanol
market. Similar to Trujillo-Barrera et al. (2012), we do not find evi-
dence of volatility spillovers going from the ethanol market to the corn
market.
Using adjusted ethanol prices (Table 5), we find different volatility
spillover relationships between the three markets. Now we find ARCH
spillover effects from the corn and oil markets into the ethanol mar-
ket (a21 and a31 , respectively). The spillover from the oil market to the
metric volatility spillover effects from the corn market to the ethanol
market (c21 ) but do not find any statistically significant asymmetric
spillover effects from the oil market to the ethanol market. The biggest
differences between the results in Tables 4 and 5 are that, in general,
we find more statistically significant GARCH effects using the adjusted
ethanol price; however, the magnitudes of the spillover GARCH effects
are small and may be economically insignificant. Second, we find statis-
tically significant shock spillover effects from the corn and oil markets
to the ethanol market (a21 and a31 ).
Together, these results suggest that once ethanol prices are adjusted
by removing the RIN price, there are greater volatility spillovers
between the three markets and the linkages between the markets
become stronger. The greater volatility spillover effects are expected
as the storable nature of RINs can provide a smoothing effect on prices.
We hypothesized that once the price of RINs are subtracted from the
ethanol price to reflect the true market value of ethanol then the
relationship between ethanol and corn should grow weaker while the
relationship between ethanol and oil would strengthen. However, our
empirical results do not support this hypothesis.
Finally, consistent with the results using the unadjusted ethanol
price, we find evidence of strong own GARCH effects suggesting that
own past volatility has an effect on prices. We also find spillover GARCH
effects; specifically, we find that past volatility in the corn market
affects the ethanol market (b21 ) and the oil market (b23 ). Moreover,
we find statistically significant – albeit economically weak – evidence
that past volatility in the ethanol market affects the oil market (b12 )
and past volatility in the oil market affects the corn market (b32 ).

7
H. An, F. Qiu and J. Rude
Fig. 3. Volatility and dynamic correlation results: Ethanol.
4.3. Volatility and the dynamic conditional correlations results
Figs. 3 and 4 illustrate the results of the estimated conditional
volatilities and conditional correlations in a graphical format for unad-
justed and adjusted ethanol prices, respectively. In both figures, the top
panel presents the dynamic path for each of the variance equations and
the bottom panel shows the dynamic conditional correlations from the
covariance equations.7
Focusing on the unadjusted ethanol market first in Fig. 3, we see
that the variance patterns of all three markets show similar reactions to
the shock of the commodity boom of 2008/09 and the associated con-
tagion spread across markets. Oil variance becomes the most volatile,
with decreasing degrees of volatility in the corn and ethanol markets
(note that the scales of the y-axes are different). Discussion of the
7
Our approach is one way of generating dynamic results, but is limited due to
the nature of the BEKK model. Other methods can capture time-varying features
of volatility spillovers. For example, Diebold and Yanaz (2009) and Barunik et
al. (2015) derive time-varying volatility spillovers using a dynamic spillover
index based on a forecast error variance decomposition from vector autoregres-
sions.
8
Economic Modelling 102 (2021) 105552
sources and reactions to the price surges in each of the markets is well
documented though there is a lack of consensus (see, e.g., Knittel and
Pindyck (2016), Lagi et al. (2015), and Sanders and Irwin (2017)). Sub-
sequent surges in volatility are not as pronounced in the oil and corn
markets but reach greater heights in late 2013 to 2015 for the ethanol
market. This increased variance in the ethanol market coincides with a
binding blend wall, and may be due to a perfectly inelastic demand for
ethanol (see Hertel and Beckman (2011) for a discussion of the impact
of a binding blend wall), where even small shocks to supply can cause
large price changes and an increased variance.
More importantly, Fig. 3 shows that the dependence between food
and fuel markets varies substantially across time. First, the correlation
between ethanol and corn reaches a historical high of approximately 0.7
around the time of the 2008/09 commodity boom. By 2013 the interde-
pendence between ethanol and corn disappears, which may be due to a
binding blend wall severing the relationship between the two markets
temporarily. Note that 2013 is also when we see a large increase in D6
RIN prices, which is likely related to the binding blend wall. We see
the interdependence return to pre-2013 levels in the remaining series.
The ethanol and oil markets also appear to become decoupled but this
relationship occurs numerous times during our time series.
H. An, F. Qiu and J. Rude
Fig. 4. Volatility and dynamic correlation results: Ethanol - RIN.
In Fig. 4, we see that the adjusted ethanol market appears to be
more volatile in the period after 2013. This suggests that RIN prices
have had a dampening effect on the volatility of ethanol prices, which
is not surprising given their storable nature. The dynamic conditional
correlation results are not markedly different when we used adjusted
ethanol prices but we can observe that the interdependence between
the adjusted ethanol and corn markets appears slightly weaker and
more volatile. A similar situation occurs for the adjusted ethanol and
oil market, but the difference is less noticeable.
Together, our results show that introducing the RIN instrument has
reduced volatility in the ethanol market. RINs also contribute to a
reduction of volatility spillovers between corn and ethanol markets.
In addition, the interdependence between ethanol and oil is weaker
when we use the market value (adjusted price) of ethanol instead of the
market (unadjusted) price. We believe this is because RIN market reg-
ulations enhance the liquidity of the ethanol market, and this reduces
price volatility and volatility spillovers.
5. Conclusion
Our main finding is that the RIN market affects the nature of the
interdependence between the ethanol, corn and oil markets by reduc-
9
Economic Modelling 102 (2021) 105552
ing volatility within and across markets thereby weakening the inter-
dependence of the three markets. In the mean equation results, we find
a statistically insignificant error correction term coefficient on the oil
regression when using the adjusted ethanol price (i.e., ethanol price
minus RIN price), which suggests that the long run equilibrium relation-
ship between ethanol and oil is stronger when we use the unadjusted
ethanol price. The volatility equation results show that once ethanol
prices are adjusted by removing the RIN price, there are greater volatil-
ity spillovers between the three markets and the linkages between the
markets become stronger. Lastly, we find some evidence that periods in
which there are higher RIN prices also coincide with periods where the
interdependence between ethanol and oil is weaker.
In 2019 the U.S. EPA introduced changes to the RIN compliance sys-
tem which were designed to bring greater transparency and to deter
price manipulation within the RIN market (EPA, 2020). The imple-
mented reforms were a step-back from those originally proposed by the
agency, which included changes to RIN retirement frequency, limita-
tions on who could purchase a RIN, and limits on the duration that par-
ties could hold RINs (Voegele, 2019). Our results indicate that the exist-
ing compliance system appears to be working. From an empirical per-
spective, ignoring the information from RIN prices could lead to incor-
rect inferences and generalizations about the relationship between the
H. An, F. Qiu and J. Rude Economic Modelling 102 (2021) 105552

three markets under different mandate regimes. The mandate under the
RFS requires that a minimum amount be consumed but a binding man-
date can lead to higher RIN prices that drive a greater wedge between
the price of ethanol and the willingness-to-pay by the blenders. This dif-
ference between the“producer price” and the “consumer price” reflects
the value of meeting the mandate, which suggests that any future pol-
icy changes (especially those reducing flexibility) around the mandates
could affect the relationship between the ethanol, corn and oil markets.
Depending on what changes occur to the RFS regarding biofuel use,
the compliance costs of meeting the mandates may increase leading to
higher RIN prices and a larger gap between the prices producers receive
and consumers pay.
The growing awareness of the food versus fuel debate and the cor-
responding increase in the number of research articles devoted to the
study of this issue is indicative of its importance both to academics and
policy makers. Our study contributes to the literature on the nature
of price volatility across the ethanol, corn, and oil markets and our
results have two broad implications. First, it provides insight to portfo-
lio managers and agribusiness stakeholders who have been relying on
the results of previous studies that the interdependence between food
and fuel markets may be changing due to the emergence of the RIN
market. Second, it has implications for estimating the impact of policy
changes if volatility spillovers are being smoothed by the RIN market
resulting in a weaker interdependence across these markets. Despite
suggestions by industry observers that RINs should be eliminated to
reduce regulatory burdens, these regulations appear to be effective in
smoothing market transactions and reducing the effects of volatility
spillovers. Therefore, market participants should be in favor of main-
taining these administrative regulations as they facilitate adjustments
to market rigidities.
Future research that can build on this study could examine more
explicitly the smoothing nature of the RIN market and how potential
reforms to this policy could affect the ethanol, corn and oil markets. In
addition, research that isolates the direct and indirect effects of the RIN
market on the aforementioned markets would shed additional insight
into how the RIN market functions.
Declaration of competing interest
The authors declare that they have no known competing financial
interests or personal relationships that could have appeared to influence
the work reported in this paper.
Acknowledgements
We thank the editor and two anonymous reviewers for their valu-
able and constructive comments, which have greatly improved both the
presentation and the content of this paper. All remaining errors are our
own.

A. Appendix A

We examine whether or not there is a long-run cointegrating relationship between any pair or triple of markets by conducting a Johansen
trace test on pair-wise I(1) logged prices to detect the existence of any long-run price relationships. The results show that ethanol and oil prices
are cointegrated and remain cointegrated even after subtracting the RIN price, though the exact nature of the cointegrating relationship differs.
Table A.1(a) shows that in the long run, a 1% increase in the price of oil leads to a 0.57% increase in the price of ethanol. Table A.1(b) shows that
a 1% increase in the price of oil leads to a 1.11% increase in the adjusted price of ethanol. This suggests that when we consider the true value of
ethanol, we find that it has a closer relationship with the oil market. This result provides some evidence supporting the idea that subtracting the
price of the RIN results in a more accurate value of ethanol according to market conditions, and strengthens the dependence between ethanol and
oil markets. In both specifications, we find that (i) ethanol and corn prices and (ii) oil and corn prices display no long run cointegrating relationship.
These findings differ from most of the existing literature on price transmission and market integration between biofuel and food markets, which
often finds a cointegrating relationship between corn and ethanol (Trujillo-Barrera et al., 2012; Saghaian et al., 2018) as well as between corn and oil
(e.g., Wu et al., 2011; Saghaian et al., 2018) in U.S. markets. However, Whistance et al. (2016) find mixed results with respect to the cointegration
of several biofuel and feedstock prices – including corn and oil – depending the on the nature of mandate regime. They hypothesize that the absence
of a cointegrating relationship is an indication that the goods are not strong substitutes. Next, we discuss our main empirical findings.{ }

Table A.1
Johansen trace tests for cointegration
Market pairs H0 Ha 𝜆trace 5% critical value
(a) Ethanol
Corn–Ethanol r = 0 r > 0 12.93 15.41
Corn–Oil r = 0 r > 0 10.68 15.41
Ethanol– Oil r = 0 r > 0 22.56 15.41
r ≤ 1 r > 1 5.06 3.84

pEthanol1
t = 34.48 + 0.57pOil
t
Cointegrating relationship:
(1.08∗ ) (0.02∗ )
(b) Ethanol-RIN
Corn–Ethanol-RIN r = 0 r > 0 10.56 15.41
Corn–Oil r = 0 r > 0 10.82 15.41
Ethanol-RIN– Oil r = 0 r > 0 21.94 15.41
r ≤ 1 r > 1 4.29 3.84

pEthanol2
t
= −21.75 + 1.11pOil
t
Cointegrating relationship:
(2.25∗ ) (0.04∗ )
Note: Standard errors in parenthesis where ∗ p < 0.01.

10
H. An, F. Qiu and J. Rude
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