Cointegration and nonlinear causality among ethanol-related prices : evidence from Brazil

Abstract

The objective of this study was to investigate the causal relationships among crude oil, ethanol and sugar prices in the context of Brazil. In doing so, we consider the application of ARDL bound tests to examine whether these variables comove in the long run. Besides, we employ a recently developed nonlinear symmetric and asymmetric test for noncausality which assists us to explore the short-run ‘lead–lag’ associations among the price indexes under review. The results of the ARDL bound test indicate that cointegration exists only when the ethanol price is used as the dependent variable. This finding suggests that oil and sugar prices lead the Brazilian ethanol prices in the long run. Moreover, the results of nonlinear causality test also confirm the existence of a short-term unidirectional causality running from sugar to ethanol market. We also document that the impact of sugar prices on ethanol prices appears to be positive indicating that rising sugar prices will cause a growth in the ethanol prices. Our findings further demonstrate that sugar prices are not affected by the fluctuations in ethanol price. The results carry important implications for policymakers.