Essays on the volatility and spillover effects of oil and food price shocks

Abstract

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 world oil and food prices are examined in the context of these same countries; within the 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 country-specific 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 GARCH-class 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 such movements. As food price volatility spillover occurs across countries, enhanced trade 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.