Modelling price transmission and volatility spillover in the Slovenian wheat market

ABSTRACT

Interdependence between first and second moments of producer and consumer wheat prices in Slovenia is assessed, in light of the recent major historical events that the country has undergone, as well as the recent rumours of cartel agreements between millers causing a decline in farm-gate prices, while leaving consumer prices untouched. A threshold vector error correction and multivariate generalized autoregressive conditional heteroscedasticity model with exogenous variables is applied. Results indicate that price-level adjustments mainly favour retailers by increasing their marketing margins. Important second-moment interactions are also identified. Increases in international wheat stocks reduce producer prices, while higher interest rates increase their instability.

KEYWORDS:

• Volatility
• threshold model
• MGARCH model
• wheat
• Slovenia

JEL CLASSIFICATION:

• C32
• Q11

Acknowledgement

The research leading to these results has received funding from the European Union Seventh Framework Programme (FP7-KBBE-2010-4) under Grant Agreement Number 265601.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Other exogenous variables were considered, but not found to be statistically significant.

² Unless otherwise indicated, the information presented in this section was obtained from SORS (2013).

³ Other explanatory variables, including interest rate, were also considered, but not found to be statistically significant.

⁴ As noted above, Kim and Chavas (2002), Frankel (2006) and Serra and Gil (2012) have stressed the relevance of the influence of interest rates on price volatility. The influence of other regressors such as stocks-to-use ratio was also considered. Results were not statistically significant.

⁵ For the period prior to the introduction of the euro, prices were converted from Slovenian tolars to Euros using the irrevocable exchange rate (1 Euro = 239.64 Slovenian tolars).

⁶ Interest rate was made available to the authors upon request. After the Slovenia adhesion to the Euro zone with the euro adoption on 1 January 2007, the interest rate published by the European Central Bank (ECB, 2013) is used.

⁷ Three-regime TVECM was also tested against a VECM. Results indicate no significant differences between both models.

Additional information

Funding

The research leading to these results has received funding from the European Union Seventh Framework Programme (FP7-KBBE-2010-4) under Grant Agreement Number 265601.