A STUDY ON THE PRICE VOLATILITY IN WHEAT, WHEAT FLOUR AND RICE MARKETS IN AFGHANISTAN

Abstract

This research investigates the unconditional and conditional volatility in wheat, flour, and high and low quality rice price returns in Afghanistan. It also considers volatility spillover from the exporting countries and global markets to the domestic markets. The ARCH LM test and GARCH (1,1) model with exogenous variables are, inter alia, employed in the analysis. The results suggest the existence of volatility clustering and persistence in all of the price return series examined, which indicates a prolonged period of uncertainty in the domestic markets after a shock that can harm both consumers and producers. Evidence of volatility spillover from exporting countries to domestic markets is also observed such that the domestic markets may be relatively less vulnerable to import wheat and flour from Kazakhstan, and rice from Pakistan. As price levels, both conditional and unconditional price volatility in the price returns have declined after January 2011 such that the level of decrease is larger for wheat and flour price returns while it is meager for the returns of high and low quality rice prices. Given the country’s context, the findings of this research imply that extreme and unpredictable changes in the staple food prices may not only deteriorate the welfare of poor households but their persistence also create uncertainty for all of the market participants.