Price connectedness in US ethanol terminal markets

This article shows, for the first time, the degree of price volatility connectedness across the major regional ethanol markets in the U.S. Connectedness measures are based on forecast error variance decompositions that inform which prices drive system dynamics. We pay special attention to volatility spillovers to and from Chicago, as it is equipped with one of the largest terminals in the U.S. and is widely regarded as the center of ethanol price discovery in the country. Ethanol prices in the Chicago terminal electronic trading platform are also suspected of being manipulated over the 2017-2019 period. We use Diebold and Yilmaz (2012 and 2014) and a rolling window approach to study the dynamics of price volatility connectedness over time. Using daily data from 2013 to the beginning of 2021, we find that Chicago is the market that generates the most innovations to other market prices. In contrast, Chicago receives the least amount of innovations from all other markets, placing Chicago at the center of price dynamics. We find that price connectedness measures are correlated with market fundamentals, policy, and concentration in the Chicago terminal electronic trading platform, with the latter being associated to an increase in the relevance of Chicago as a central market.