Staple Food Price Volatility and its Derivers in Ethiopia: GARCH Family Models

Abstract

Food price inflation in Ethiopia commenced suffering high rates in 2004 that pose risks for poor people's livelihoods and food security. While it was not a severe challenge before the period. Accordingly, analyzing the staple food price volatility and its core drivers have noteworthy contributions to food market management and risk valuation. The unit root tests imply that all independent variables became stationary after the first differences transformation, and the three dependent return variables were stationary at level. The staple food prices revealed stylized facts of financial time series, and they confirmed ARCH effects presence in condition mean equations. Since the generalized autoregressive conditional heteroscedasticity (GARCH) family models were applied to the price series in the period of January 2000 to May 2019. Based on the model selection criteria, asymmetric effect significance and forecast error accuracy, best-fit models for monthly return prices of maize, wheat and teff were selected and modeled using ARMA(1,3)-EGARCH(1,0), AR(1)-EGARCH(1,0) and AR(1)-GARCH-M(1,1) respectively with the same normal error distribution assumptions. One month lagged shocks of the prices of maize and wheat have statistically significant effects on the current month's volatility. The asymmetric effect of maize price volatility inclines to go in response to bad news than good news while the wheat responses to good news than bad news. The impact of the price of the fertilizer and global-wheat and exchange rate on the conditional variances of the Ethiopian wheat has become stable than the general inflation rate. The influence of the price of the fertilizer and global-wheat and exchange rate on the conditional variances of the Ethiopian teff has to stabilize than the fuel oil price. Also, the global maize price decrease makes a more stable marketing environment with a more volatile Ethiopian maize price. The Ethiopian government should provide more devotion to the influential factors and must draw and execute flexible trade, investment, exchange rate, and monetary policies, which shall consider and go with the dynamic internal and global markets to sustain the Ethiopian food market.

Keywords: Ethiopia, GARCH Family Models, Price volatility and Drivers, Staple Food.