Commodity Price Volatility under New Market Orientations

Weaver, Robert D and Natcher, William C (2000): Commodity Price Volatility under New Market Orientations.

Abstract

Recent national and international regulatory reforms (e.g. U.S. FAIR and other GATT compliance reforms) in agricultural markets has led some observers to wonder whether the private sector is able to produce a level of price volatility that is socially acceptable. In this paper, we examine the post reform track record of price volatility and its transmission across vertically linked and geographically linked markets. Livestock, grain, and dairy market data (monthly) are considered across the U.S. and E.C. The standard commodity-pricing model supports the hypothesis that competitive storage acts to reduce the volatility of cash prices. Further, speculative attacks and stock outs have been shown to induce increased volatility. This motivates a scope of consideration that includes prices as well as stock levels to assess their contribution to price volatility. The paper considers evidence based on three decades of monthly data and advanced time series techniques. First, univariate volatility estimates based on the autoregressive conditional heteroskedasticity (GARCH) model are evaluated and compared to historical temporal variation to highlight the importance of well grounded estimation of volatility. Next, the relationships between stocks and the conditional mean, as well as the conditional and unconditional variances of the price series, are assessed for dairy and grain products. Finally, reform associated changes in the structure of the transmission of volatility through vertical markets are considered for dairy products and across geographic markets is considered for grains.

• Item Type: MPRA Paper
• Language: English
• Keywords: Price volatility; price risk; inventories; commodity prices
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes

References

Agri Finance (1997). "1996 Farm Bill Increases Risk." p. 24 Antoniou, A., and P. Holmes (1995) “Futures Trading, Information and Spot Price Volatility: Evidence for the FTSE-100 Stock Index Futures Contracts Using GARCH.” Journal of Banking & Finance Vol. 19 pp. 117-129

Aradhyula, S.V. and M.T. Holt (1988) "GARCH Time-Series Models: An Application to Retail Livestock Prices." Western Journal of Agricultural Economics Vol 13 No. 2 pp. 365-374

Baldauf, B. and G.J. Santoni, (1991) “Stock Price Volatility: Some Evidence from an ARCH Model” The Journal of Futures Markets, Vol. 11, No.2, pp. 191-200

Brunetti, C. and C.L. Gilbert (1995) “Metal Price Volatility”, 1972-95, Resource Policy, Vol. 21 No.4 pp. 237-254

Chavas, J. and M.T. Holt (1991) "On Nonlinear Dynamics: The Case of the Pork Cycle." American Journal of Agricultural Economics pp. 819-828

Cho D.C., and E.W. Frees, (1988) “Estimating the Volatility of Discrete Stock Prices” The Journal of Finance, Vol. XLIII pp. 451-466

Chou, R.Y. (1988) “Volatility Persistence and Stock Valuations: Some Empirical Evidence Using GARCH.” Journal of Applied Econometrics Vol 3 pp. 279-294

Crain, S.J. and J.H. Lee (1996) “Volatility in Wheat Spot and Futures Markets, 1950-1993: Government Farm Programs, Seasonality, and Causality.” The Journal of Finance Vol. LI pp.325-343

Engle, Robert F. and Tim Bollerslev (1986) “Modelling the Persistence of Conditional Variances.” Econometric Reviews Vol 5 pp. 1-50

Hamilton, James D. (1994) Time Series Analysis. Princeton University Press, Princeton NJ

Han, D.B., D.W. Jansen, and J.B. Penson, (1990) "Variance of Agricultural Prices, Industrial Prices, and Money." American Journal of Agricultural Economics pp. 1066-1073

Helmberger, P.G., R.D. Weaver, and K.T. Haygood (1982) “Rational Expectations and Competitive Price and Storage.” American Journal of Agricultural Economics Vol. 64. No. 2 pp. 266-270

Lee, J.H.H. (1991) “A Lagrange Multiplier Test for GARCH Models.” Economic Letters, 37, pp265-271

Locke, P.R. and C.L. Sayers (1993) “Intra-Day Futures Price Volatility: Information Effects and Variance Persistence.” Journal of Applied Econometrics Vol. 8 pp. 15-30

Miranda, M.J. and P.G. Helmberger (1988) “ The Effects of Commodity Price Stabilization Programs.” The American Economic Review Vol. 78 pp. 46-58

Najand, M. and K. Yung (1991) “A GARCH Examination of the Relationship Between Volume and Price Variability in Futures Markets.” The Journal of Futures Markets Vol. 11 No. 5 pp. 613-621

Nelson, Daniel B. (1990) “Stationarity and Persistence in the GARCH(1,1) Model.” Econometric Theory Vol 6 pp.318-34

Park, H.Y. (1996) “Trading Mechanisms and Price Volatility: Spot Versus Futures.” The Review of Economics and Statistics pp. 175-179

Peterson, R.L., C. K. Ma, and R.J. Ritchey (1992) “Dependence in Commodity Prices.” The Journal of Futures Markets Vol. 12 pp. 429-446

Poterba, J.M. and L.H. Summers (1986) “The Persistence of Volatility and Stock Market Fluctuations.” The American Economic Review Vol. 76 pp. 1142-1151

Stuart, K. and C.F. Runge (1996) “Agricultural Policy Reform in the United States: An Unfinished Agenda.” The Review of Marketing and Agricultural Economics.

Yonkers, R. D. and J.W. Dunn. "Managing Price Risk in the Absence of Government Support Programs." Farm Economics. Pennsylvania State University, November, 1996.