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Testing for Speculative Behavior in US Corn Ethanol Investments

descriptionPublicationkeyboard_double_arrow_right Other literature type , Preprint 01 Jan 2010 English Publisher:UnknownJournal:Research Papers in Economics

Authors: Kumarappan, Subbu; Gustafson, Cole R.; Kumarappan, Subbu; Gustafson, Cole R.;

doi: 10.22004/ag.econ.61418

Testing for Speculative Behavior in US Corn Ethanol Investments

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Abstract

Crude oil price speculation during 2000s could have increased installed capacity in corn ethanol plants beyond what was warranted by the market factors. We use Muth’s commodity pricing model and Flood and Garber’s tests to test for speculative investment in US corn ethanol industry. The ethanol price expectations are derived using a system of supply-demand-inventory describing US ethanol markets under rational expectations (perfect foresight). These price expectations can help differentiate the installed capacity into two: capacity supported by the market fundamentals and the probable capacity that is installed based on speculation. Econometric estimation procedures and functional form approximations are discussed.

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Keywords

commodity prices, Agricultural Finance, speculation, investment, ethanol, speculation, commodity prices, investment, Agricultural Finance, Financial Economics, Q14, Q41, D8, L71,, Financial Economics, ethanol

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