Analysing Price Risk and Volatility in the Namibian Sheep Market: A Threshold Generalized Autoregressive Conditional Heteroskedasticity (TGARCH) Approach

Abstract

The objective of this paper is to analyse sheep producer’s supply response under price risk and volatility using data from January 2000 to December 2013. Different Autoregressive Conditional Heteroscedastic (ARCH) processes were compared and TGARCH (1, 1) model was selected and used to estimate expected price and price volatility effects. The study found positive inelastic short-run supply price elasticity of 0.2184 for the Namibian sheep industry. The long-run own-price supply elasticity is more elastic than in the short-run (0.6817). The findings also show that the expected price volatility (-0.1385) has a negative and statistically significant effect on producer’s supply response, this implies that sheep supply declines as the price volatility increases. The volatility effects were found to be negatively asymmetric and persistent which implies that producers tend to respond more intensely in the case of a negative shock that reduces their margin than a positive shock. Sheep producer’s attitude towards risk can be said to be averse, this hypothesis was confirmed by calculating the relative marginal risk premium which is 0.0257. The value is close to zero and may suggest no strong departure from relative risk neutrality or marginal cost pricing.

Keywords: Volatility, asymmetric effects, persistence, elasticity, risk, price expectation