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Abstract

Egypt is considered a higher wheat importer in the world, and given the reality that futures prices lead spot prices that makes the Egyptian prices vulnerable to future wheat markets. This study assesses the relationship between Egyptian flour prices and future wheat prices associated with Paris (MATIF) and USA (CBOT). Markov switching-vector error correction methods are used to estimate two regimes by splitting the sample by high and low volatility regimes. This study also examines the dynamic conditional correlation using Asymmetric-Dynamic Conditional Correlation with Multivariate Generalized Autoregressive Conditional Heteroscedasticity (DCC-GARCH). Results suggest a high volatility regime observes especially during the extreme market events; in the time of the food crisis 2007/2008 and 2010 as well as after two revaluations in Egypt in 2011 and 2013 and during the economic reforms in 2016, mainly in the range from 0 to 0.4 before crisis, while the fluctuations are higher in the time of food crisis, revolutions and economic reform that in the range from -0.2 to 0.8. This implies that the negative impact of the economic and political crisis on the consumer prices. The results provide evidence of symmetric volatility spillovers from future markets to Egyptian wheat market. Results from impulse response functions indicate that shock by 1% in the future markets will lead to positive shock in the flour spot market in Egypt.

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