Modeling regime‐dependent agricultural commodity price volatilities |
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| Authors: | Na Li Alan Ker Abdoul G. Sam Satheesh Aradhyula |
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| Affiliation: | 1. Department of Nutritional Sciences, University of Toronto, Toronto, Canada;2. Institute for the Advanced Study of Food and Agricultural Policy, University of Guelph, Canada;3. Department of Agricultural, Environmental and Development Economics, The Ohio State University, Columbus, USA;4. Department of Agricultural and Resource Economics, The University of Arizona, Tucson, USA |
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| Abstract: | In stark contrast to financial markets, relatively little attention has been given to modeling agricultural commodity price volatility. In recent years, numerous methodologies with various strengths have been proposed for modeling price volatility in financial markets. We propose using a mixture of normals with unique GARCH processes in each component for modeling agricultural commodity prices. While a normal mixture model is quite flexible and allows for time varying skewness and kurtosis, its biggest strength is that each component can be viewed as a different market regime and thus estimated parameters are more readily interpreted. We apply the proposed model to ten different agricultural commodity weekly cash prices. Both in‐sample fit and out‐of‐sample forecasting tests confirm that the two‐state NM‐GARCH approach performs better than the traditional normal GARCH model. A significant and state‐dependent inverse leverage effect is detected only for pork in the regime where the price is expected to drop, indicating the volatility in this regime tends to increase more following a realized price rise than a realized price drop. |
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| Keywords: | G17 Q14 GARCH Volatility Value at risk Normal mixture |
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