STUDYING THE BEHAVIOR OF ETHANOL PRICES IN SÃO PAULO: PERSISTENCE AND VOLATILITY AS A LONG MEMORY PROCESS

Abstract

This article studied the volatility of hydrated ethanol in São Paulo for 2000/2011 period. The application of ARCH models, as well as the consideration of price series of ethanol as a process of a long memory in both the mean and conditional variance allowed to estimate the degree of persistence in volatility shocks. The analysis supports the government’s concern with the high degree of persistence in volatility, and encourages the depth of the discussion around formation of buffer stocks. The results corroborate the theory advocated by Ipea (2010) that the consolidation of flex-fuel cars helped to foster price stability and indicates that the post crisis is characterized by a higher persistence of volatility; the level shown this period is lower than before 2004, when the flex-fuel cars did not encourage market impacts.