The Application of Garch Family Models for Agricultural Crop Products in Amhara Region, Ethiopia
Keywords:
Price volatility, Bean and pea, Amhara Region, Garch family modelsAbstract
In the recent past, the price of general commodities has increased in Ethiopia as well as in the world. The main objective of this study is to identify and analyze the factors that affect the average monthly price volatility of pulses (bean and pea) in Amhara National Regional State over the period of December 2001 to June 2012 GC. The return series considered exhibited typical characteristics of financial time series such as volatility clustering, leptokurtic distributions and asymmetric effect and thus, can suitably modeled using GARCH family models. Among such models entertained in this study, ARMA(4,4)-EGARCH(2,3) with GED for bean and ARMA(1,0)-EGARCH(1,2) with student-t for pea were chosen to be the best fit models. From the results, exchange rate and general and food inflation rates were found to be an increasing effect on price volatility of bean and pea. On the other hand, rainfall was found to have a stabilizing effect on the price volatility of these crops. Moreover, saving interest rate has a decreasing effect on the price volatility of bean. The results also revealed that price volatility has seasonal variation. The asymmetric terms were found to be significant in all GARCH models considered. Thus, price volatility tends to over-react in response to bad news as compared to good news. Furthermore, the significance of the EGARCH terms provides strong evidence of volatility spillover from one period to another.
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