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you will recognise the author's right to be identified as the author of the thesis and due acknowledgement will be made to the author where appropriate you will obtain the author's permission before publishing any material from the thesis. Essays on the Volatility and Spillover Effects of Oil and Food Price Shocks A thesis submitted in partial fulfilment of the requirements for the Degree of Doctor of Philosophy in Economics at Lincoln University by Md. Fardous Alom Lincoln University
of a thesis submitted in partial fulfilment of the requirements for the Degree of Doctor of Philosophy in Economics Abstract Essays on the Volatility and Spillover Effects of Oil and Food Price Shocks by Md. Fardous Alom This thesis comprises five self contained but related essays on the volatility and spillover effects of oil and food price shocks, making contributions to the understanding of food and energy price dynamics and their relationships with macroeconomic variables such as industrial output, inflation, interest rates, exchange rates and stock prices.
The first two essays are concerned with modelling the extent of volatility in oil and food prices within the framework of generalised autoregressive conditional heteroskedasticity (GARCH)-class models. The first essay models and examines the asymmetry and persistency in the volatility of crude oil future price returns along with heating oil, gasoline, natural gas and propane future price returns, in the global context. The second essay models the volatility of food price returns within and across global and selected Asia and Pacific countries; namely Australia, New Zealand, South Korea, Singapore, Hong Kong, Taiwan, India and Thailand.
The third essay examines the cross country mean and volatility spillover effects of food prices in the context of the countries mentioned above. This is followed in the fourth essay by an investigation of the mean and volatility spillover effects of world oil prices on food prices in the context of the above listed countries. In the fifth essay, the macroeconomic effects of
framework of an empirical structural vector autoregression (SVAR) model.
The major findings of the study include the following: First, oil prices can be regarded as financial assets and, hence, can be modelled with the aid of econometric models such as GARCH models and their extended versions. Oil prices are persistent and asymmetric with respect to the volatility of external shocks; however, other petroleum prices show persistent effects to the volatilty while the evidence of asymmetry is mixed across time periods. Second, like other asset prices, food price returns can be modelled with GARCH-class models in general and with component GARCH (CGARCH) models in particular at global and countryspecific levels. Food price returns are persistent to the shocks of their own volatility while evidence of asymmetry is mixed for different time periods and for different countries. The proposition of risk led return finds scant empirical support. Third, the study reveals weak evidence of own and cross country mean return spillover effects and relatively strong evidence of volatility spillover effects of food prices across time periods. The analysis in the fourth esssay exposes strong evidence of shortrun mean and volatility spillover effects along with some longrun evidence from world oil prices to food prices of the concerned countries.
Finally, the thesis also discovers evidence of the influence of world oil and food prices on economic activities such as growth of industrial production, inflation, exchange rates, interest rates and stock prices of the countries studied, though the effects vary in degree and magnitude across countries and variables.
Although the objective of this study is not to provide specific policy prescriptions, the empirical findings of this study provide some important insights to business practioners and policymakers. The volatility in petroleum and food prices can be modelled with GARCHclass models and their extended versions, however, since the forecasting abilities of models differ product to product for different time periods, product specific empirical models should be developed and refined for forecasting movements in oil and food prices in order to monitor
relationships and consideration of other countries’ food policies, while policies designed to reduce food price volatility may bring better outcomes. The common belief that oil prices influence food price volatility has been confirmed in this study. The results suggest that combined policy measures for both oil and food price volatility reduction may help to reduce the impact of volatility. Hedging strategies, both from investors and governments, may contribute to moderating the ill effects of food and oil price shocks. Finally, the results suggest that businesses should consider the economic characteristics of individual economies, such as whether they are energy and food resource rich and also whether they are dependent on imported oil, when investing in energy or food markets. Similarly, policymakers may also consider national reserves of energy and food resources, dependencies on oil, and economic characteristics to achieve better outcomes of policy measures. Nonlinear effects of energy and food prices on economic activities indicate countercyclical policies may work better. Further, while developed countries, excepting Korea, are not impacted by food price shocks, developing countries, such as India and Thailand, are exposed to food price volatility. These countries could design proper food security measures to reduce the impact of food price shocks.
Keywords: oil price; food price; petroleum; asymmetry; persistency; modelling; mean; cross country; volatility; spillover; shocks; transmission; macro; financial; GARCH; SVAR; Asia;
“At times our own light goes out and is rekindled by a spark from another person. Each of us has cause to think with deep gratitude of those who have lighted the flame within us.” --Albert
This Ph.D thesis is outcome of my three years rigorous work but of course I was not left alone to struggle and sink on this journey. First and foremost, my sincere thanks to the Almighty who enabled me to accomplish this work and arranged wonderful people for me throughout the whole process. I am indebted to many people in the process of preparing this thesis. I may not list all of them but that does not mean that I am not acknowledging them at all.
Some people deserve special thanks and gratitude, who I am pleased to mention in this occassion. My sincere thanks and gratitude go to my supervisor Mr Bert D. Ward for his skilful guidance, encouragement and philosophical knowledge transfer. The day I came to Lincoln, Mr Ward, you were not in town but you did not forget to leave a note for me to install JMulTi in my computer. Before seeing you with that note I realised that I had a long way to go with different software packages. I have become proficient with Eviews, RATS and JMulTi with your special care. You helped a lot in terms of preparing and publishing journal articles throughout my study period. Secondly, I am grateful to my associate supervisor and one of my course teachers, Dr Baiding Hu. Dr Hu provided useful comments and criticisms regarding building the thesis in a coherent way. Mr Ward and Dr Hu the thesis could not have achieved its current shape except for your sincere guidance. Please accept my heartfelt thanks.
I gratefully acknowledge editorial service of Jane Clark on the final draft of thesis.
Students in developing countries struggle a lot, especially when seeking admission to PhD programs in any school in developed countries, and I am not an exception to this. In my case a ‘magic’ man helped me out and I cannot help but mention his name here. Dr Gillis Maclean,
supervisors, brought me to Lincoln University. Even after my arrival, I had consistent support from him regarding study or any personal matter. Dr Maclean, please accept my special thanks.
One of the most important prerequisites for doing an independent research is funding. In this regard, I am grateful to Lincoln University for granting me the prestigious Lincoln University Doctoral Scholarhip for the tenure of my PhD study. Scholarship manager Jane Edwards’ consistent and prompt support regarding scholarhip issues is highly appreciated. Apart from this scholarship, I have been awarded the opprtunity for teaching and tutoring positions thoroughout my study. Further, I have been given research assistantships for almost the entire tenure of my study. These positions greatly contributed to my research career building as well as helping me to lead a smooth life here in Lincoln with my family. My sincere thanks go to Dean Patrick Aldwell, Professor Ross Cullen, Head of Economics and Finance, Dr Nazmun Ratna, Dr Gillis Maclean and Eileen Seymour (Finance administrator) for their sincere cooperation in different capacities. I also highly appreciate the generocity of the Bangladesh government for granting me deputation for the entire tenure of this study.
I gratefully acknowledge conference fundings and logistic support from the department. Due to this, I was able to present several papers, based on my research findings in national and international conferences. My special thanks, in this regard, go to my supervisors, Professor Ross Cullen, Eileen Seymour, Carmen Campbell (Postgraduate administrator), Annette Brighton (Department secretary), Suzanne Huddlestone (PA to Dean) and Margot Beck (Department secretary). I also express my heartfelt gratitudes to the participants at my conferecne sessions namely Annual Hawaii Interantional Business Research Conference held on 27-28 September, 2010; WEAI Pacific Rim conference held on 29 April to 1 May in Brisbane, 2011; NZAE conference held on 29 June to 1 July, 2011 in Wellington; NZARES conference held on 25-26 August, 2011 in Nelson and Lincoln University postgraduate
Dr Roger Ham, Professor Ross Cullen, Professor Mark Holmes, Professor Arther Grimes.
Their constructive comments added value to this research work. One name even deserve special mention, Professor Ronald A. Ratti, University of Western Sydney, who provided very useful written comments for the first chapter of this thesis at WEAI conference. I am very grateful to him.
Finally, I would like to express my sincere gratitude to my wife Jakia Afrose Hira, my daughter Fariha Alom, my son Ahnaf Alom, my parents and my parents in law. Their continuous moral support, love and inspiration made the journey worthwhile and easier. My wife, daughter and son allocated 12-14 hours of each day for my study without any complain.
I owe you most for finishing this thesis. My dear wife, daughter and son trust me this achievement is not mine alone, you are part of it.
Thanks everyone for being part of this rigorous journey. But of course any errors and ommissions remain solely on my shoulders.
Table of Contents
List of Tables
List of Figures
List of acronyms and abbreviations
Chapter 1 Introduction
1.1 Purpose statement and objective of the study
1.2 Motivation and research context
1.3 Data and sources
1.4 Overview of data analysis methodology
1.5 Structure of the thesis
Chapter 2 Petroleum Future Price Volatility Modelling: Analysing Asymmetry and Persistency
2.2 Data and their statistical properties
2.3 Model framework and empirical findings
2.4 Empirical results
Chapter 3 Component GARCH Modelling of Food Price Volatility: Analysing Asymmetry and Persistency
3.2 Data and their statistical properties
3.3 Methodology and Empirical Results
22.214.171.124 CGARCH Models of Food Price Volatility
126.96.36.199 Empirical results
Chapter 4 Cross Country Mean and Volatility Spillover Effects of Food Prices:
Evidence for Asia and Pacific Countries
4.2 Literature review
4.3 Food export-import status
4.4 Data and their statistical properties
4.5.1 Methods for mean and volatility spillover effects
4.5.2 Multivariate GARCH models
4.6 Empirical results and discussion: Univariate CGARCH models
4.6.1 Results of MTGARCH analysis
4.7 Diagnostics on the validity of models
Chapter 5 Spillover Effects of Oil Prices on Food Prices: Evidence for Some Asia and Pacific Countries
5.2 Data and their statistical properties
5.3.1 Methods for analysing mean spillover effects of oil prices on food prices......... 81 5.3.2 Methods for volatility spillover effects of CP on FP
5.3.3 Volatility models for oil price
5.3.4 Univariate volatility spillover models for food prices
5.3.5 Multivariate methods for mean and volatility spillover effects
5.4 Empirical results
5.4.1 Mean spillover effects from oil prices to food prices
5.4.2 Granger causality (GC) test results
5.4.3 Analysis of forecast error variance decompositions (FEVD)
5.4.4 Analysis of impulse response functions (IRF)
5.4.5 Volatility spillover effects from CP to FP returns: Univariate case
5.4.6 Results of multivariate analysis