Agris on-line Papers in Economics and Informatics

Faculty of Economics and Management CULS Prague, Kamýcká 129, 165 00 Praha - Suchdol

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Price Volatility Modelling – Wheat: GARCH Model Application

Michal Čermák, Karel Malec, Mansoor Maitah

DOI: 10.7160/aol.2017.090402

Agris on-line Papers in Economics and Informatics, No 4 /2017, December

pp. 15-24

Čermák, M., Malec, K. and Maitah, M. (2017) “Price Volatility Modelling – Wheat: GARCH Model Application", AGRIS on-line Papers in Economics and Informatics, Vol. 9, No. 4, pp. 15-24. ISSN 1804-1930.DOI 10.7160/aol.2017.090402.

Abstract

This paper is focused on the modelling of volatility in the agricultural commodity market, specifically
on wheat. The aim of this study is to develop an applicable and relevant model of conditional heteroscedasticity
from the GARCH family for wheat futures prices. The GARCH (1,1) model has the ability to capture
the main characteristics of the commodity market, specifically leptokurtic distribution and volatility
clustering. The results show that the forecasted volatility of wheat has a tendency towards standard error
reversion in the long-run and the position of price distribution is closed to the normal distribution. The wheat
production can be hedged against the price variability with long-term contracts. The price of wheat was
influenced during the years of 2005 to 2015 by different events, in particular; financial crisis, increasing grain
demand and cross-sectional price variability. The results suggest that agricultural producers should focus
on short-term structural events the wheat market, rather than long-term variability.

Keywords

Price volatility, forecasting, GARCH, wheat price, CME, futures contracts.

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