An Empirical Study Of Price Volatility On International Rice Market: An Arch Model

Previous studies mostly focus on reasons accounting for price change. For instance, the recent worldwide increase in food price has drawn a lot of attention, whereas food price volatility has not been given enough attention. Volatility in price may be the normal case in food market. After entering the 21st century, the soar in food prices and their substantial drop after 2008 makes this normal case become worse.Based on monthly price data from 1990 to 2008 on international rice market, this thesis measures price volatility of rice by variance and takes into account the ARCH effect caused by carryover effect of inventory, which fill in the two gaps in existing studies. At the same time, this thesis also analyses the impact of trade liberalization, oil price and US dollar exchange rate on food price volatility. We conclude as follows:(1) There is ARCH effect in rice price on international market, namely the variance of prices is variable and has volatility clustering, which means price variances in two successive periods are serially correlated.(2) The "leverage effect" in stock market also exists in international rice market, which means the impacts of positive and negative price shock on price volatility are asymmetric. Specifically, positive price shock has more power to destabilize the price volatility than negative price shock. The reason is that the price increase out of positive price shock encourages the stock holders to sell out their stock and the drop in stock level will weaken its ability to buffer against external shocks and to stabilize the price level, which will worsen the price fluctuations in next period.(3) The increase in trade liberalization out of WTO negotiation increase price volatility on international rice market. Reasons accounting for this could be the increase of integration level in global food market, worldwide decrease in stock level after 2001, speculation and protective measures by governments when food prices are soaring.(4) Increase in oil price and depreciation of dollar exchange rate contribute to rice volatility on international rice market.