Price Volatility Spillovers Among Major Wheat Markets in the World

Abstract

This research determined price volatility spillovers among major wheat markets in the world using time series data (1966-2018) of six major wheat producing countries in the world. The data were sourced from FAO and UNCTAD databanks and were analyzed using descriptive statistics, multiple regression, unit root test and GARCH models. The findings showed that there is low and high persistence in the wheat prices of Canada and USA; and, Australia and India, respectively. Thus, it was established that the prices in the former markets were characterized by short memory; the effect of shock is temporary as the prices return to the attractor level within a short period. However, bad news on the prices of the latter markets has pronounced effect and takes a longer period for the price series to normalize. On the other hand, French and Chinese market price series exhibited an explosive pattern; the price series have infinite memory and the effect of innovation is permanent as price series will not normalize. Therefore, it can be concluded that the future trade of wheat is useful in the market given the persistence behavior of the prices as their price trends are tailored towards a rational expectation rather than a naïve expectation. However, for the market prices that are explosive, the market participants should focus on rational market expectation as a trade barometer.