Price Volatility and Rational Expectations in a Sectoral Framework Commodity Model: A Multivariate GARCH Approach

Agricultural Economics, Forthcoming

30 Pages Posted: 4 Dec 2010 Last revised: 21 Dec 2010

Anthony N. Rezitis

affiliation not provided to SSRN

Konstantinos S. Stavropoulos

affiliation not provided to SSRN

Date Written: December 2, 2010

Abstract

This paper explores supply response models in a rational expectations framework with endogenous risk by using a multivariate GARCH model with Cholesky decomposition. This approach allows the incorporation of price volatility as a risk factor into the supply response of a primary commodity sector that is composed of several markets of homogenous products. The model is applied to the Greek meat sector, which is composed of four major meat categories, i.e. beef, lamb, pork and broiler, and thus the model for the entire market includes supply and demand equations for all the four meat markets, which are estimated simultaneously. The empirical results confirm that price volatility is a significant risk factor in Greek meat production and also provide useful implications about the cost factors of production. Furthermore, the empirical findings show that the last reform of the Common Agricultural Policy seems to have had a negative effect on beef and lamb production in Greece.

Keywords: supply response, price volatility, CAP, MGARCH

JEL Classification: Q11, C51, D2

Suggested Citation

Rezitis, Anthony N. and Stavropoulos, Konstantinos S., Price Volatility and Rational Expectations in a Sectoral Framework Commodity Model: A Multivariate GARCH Approach (December 2, 2010). Agricultural Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1718961

Anthony N. Rezitis (Contact Author)

affiliation not provided to SSRN

Konstantinos S. Stavropoulos

affiliation not provided to SSRN ( email )

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