Price Volatility Modelling – Wheat: GARCH Model Application

Michal ČermákKarel MalecMansoor Maitah

DOI 10.7160/aol.2017.090402
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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