Forecasting Nigeria’s inflation and the world prices of her major agricultural export commodities with probability distributions via VaR and ES and estimating their dependence via copula

Abstract

ABSTRACTEleven most common distributions in finance are fitted to the monthly log-returns of the average world prices of Nigeria’s major agricultural export commodities and inflation in Nigeria. After considerable model selection procedure; the logistic distribution is shown to give the best fit to the world prices data, while the generalized logistic distribution gives the best fit to the inflation data. Five most popular Archimedean copulas are used to describe the dependence between the two macroeconomic variables and the Clayton copula emerged as the best fitting copula. The emergence of the Clayton copula suggests a link between low world prices of Nigeria’s major agricultural export commodities and low inflation in Nigeria. The Kendall’s-tau dependence measure of the Clayton copula indicates about 12% dependency of Nigeria’s inflation on the world prices of her major agricultural export commodities. Forecasts based on Value at Risk and Expected Shortfall are given.