An Analysis of the Dependence Between Crude Oil Price and Ethanol Price Using Bivariate Extreme Value Copulas

Abstract

This paper studies the dependence structure between the returns of ethanol prices and crude oil prices. Since our focus was on the dependence behavior based on component-wise maxima, bivariate extreme value copulas were adopted. Our empirical study used two energy spot prices, the Chicago Ethanol Spot data and the North Sea (Forties) spot Crude Oil at the daily base. The data are collected from EcoWin. The data span is from November 4, 2005, to December 26, 2013, at a daily frequency.

The results showed that after the middle of the year 2009, the dependence between these two energy sources in the U.S. was weak. This analysis could benefit those who are planning to invest in crude oil and ethanol. Moreover, it can guide government investors and private companies that manage power sector portfolios.