Modelling Market Linkages along the Vertical Supply Chain: Price Transmission and Volatility Spillovers in the U.S. Pork Industry

Abstract

This paper assesses the linkages among farm, wholesale and retail markets along the U.S. pork supply chain by analyzing their price transmissions and volatility spillovers. Data used in the analysis include monthly farm, wholesale and retail price for pork, covering the period of January 2000 through December 2014. Engle and Grager’s cointegration technique was adopted to examine long run price relationships for each pair of markets, while an asymmetric VAR-BEKK-GARCH model was followed to investigate whether asymmetry plays a role in short-run price adjustments and volatility spillovers. Key findings of this study include: (1) the presence of long-run relationship in all three pairs of markets; (2) asymmetric short-run price adjustments in retail and farm markets; (3) asymmetry in wholesale price volatility, wholesale price will be more volatile when confront with positive shocks; (4) bi-directional volatility spillovers in all three pairs of markets; and (5) asymmetric spillover effects to wholesale and farm markets, with price instabilities being more sensitive to the joint shocks that move in different directions.