Xavier Cirera: Measuring volatility and its impact

Measuring volatility and its impact Xavier Cirera Date: 02:02:2012

OutlineVolatility measurementVolatility impactVolatility differencesVolatility causesSome final thoughts

Measures of volatilityMain measures of variations in agricultural prices over time Unconditional standard deviation of prices over a period of time – assume that past realizations of level and volatility do not affect future realization – ignores distinction between predictable and unpredictable price changes – some changes are predictable Key question is whether we are interested in all price variability or only on the unpredictable part Test for whether price series are trend or difference stationary –in first case shock has temporary effect in second cases shocks are permanent – (problem when there is a structural break) Easy solution de-trend prices – predictable part captured by a time trend and unpredictable by the error term – volatility is defined as the variance of the error term

Measures of volatilityMore sophisticated measures Autoregressive Conditional Heteroskedasticity (ARCH) or Generalized Autoregressive Conditional Heteroskedasticity (GARCH) – future prediction is conditional to previous realizations – Based on an AR model estimates volatility based on a function of the past residuals (ARCH) and past volatility (GARCH) – The predictable part is modelled according to past realizations – Lower volatility than unconditional measures    0   e  ...  e t 2 2 1 t 1 2 p t p    0   e  ...  e  1 1  ...  p p t 2 2 1 t 1 2 p t p 2 2

Volatility impactWhy volatility matters?.... Not obvious The impact depends on capacity of producers to affect prices, pass- through to producers and consumers and the degree of risk aversion. Unpredictable volatility creates risk for producers and consumers – sub-optimal decisions for production, investment and consumption Farmers without access to financial services may not be able to transfer income from one period to another, therefore household welfare and farm viability is there threatened by large volatility. Farmers will invest in inputs and as risk increases substantially reduce investments, which will have negative long-term impacts on farm productivity

Volatility impactFor whom matters most?.... Not obvious Clear negative impact on producers and on misallocation of resources The impact on consumers will depend on their capacity to adjust and substitute goods in their consumption basket – theoretically depending on income and price elasticy of demand and risk aversion, consumers could benefit from price volatility (evidence?) Speculators can benefit from price volatility Impact is complex - most rural households are both producers and consumers However, it is important to keep in mind that the distributional impact of volatility may be quite different from the distributional impact of high food prices

Volatility differencesVolatility depends on price transmission, which depends on: – how well integrated markets are, globally and nationally; – whether countries are net importers or net exporters; and – the extent of government interventions and price distortionsVolatility of producer prices tends to be larger than volatility ofconsumer pricesVolatility of domestic prices (what should matter most) use to belarger than volatility of international prices – but some evidencethat this has changed in recent years – different sources ofvolatility

Volatility causesClimate change shocksDemand shocksLink with energy marketsTraders activity and speculationDepleted stocks making price management difficultGovernment policies - export restrictions, import tariffs,..It is important to distinguish the impact of these factors on the price leveland on price volatilityAlso each determinant has very different implications for policies toreduce volatility – difficult to manage the impact climate changeshocks, or more importantly large demand shocks

Some final thoughtsImportant to separate conceptually food price volatility from high foodprices – this is important to understand the welfare effects and thepolicy responsesBut clearly both are correlated, so key question (for me) is whetherprice volatility matters more when price levels are high? (for exampleby making more difficult for producers to take advantage of highprices)Some important question for discussion: - For whom volatility matters and what is the main impact? - What causes volatility and how this relates to high food prices? - What are the main policy options to reduce volatility?

THANK YOU

Xavier Cirera: Measuring volatility and its impact

by futureagricultures

Accessibility

Categories

Upload Details

Usage Rights

Statistics

Xavier Cirera: Measuring volatility and its impact Presentation Transcript