Abstract
Using a GARCH model the paper sought to test the hypothesis that price volatility of key Sub Saharan Africa primary commodity exports, have not changed over the past four decades. Whilst crude oil, aluminium, cocoa and six others have not experienced significant change in price volatility over the period, nine other major commodities recorded changes. Efforts need to be made to extensively diversify the portfolio of agricultural commodity exports by including new products of which price volatilities in the past decades have been reduced. This is crucial for countries that depend on up to three primary commodities for the bulk of their foreign exchange earnings. Other measures such as value addition can also help in reducing impacts of unfavourable price movements.
Highlights
Much empirical work has generated stylised facts that indicate that volatility, trends and cyclical behaviour are inherent salient features of primary commodity prices
Following Cuddington and Liang (1998) and Swaray (2002), this paper has sought to ascertain the suitability of generalised ARCH model (GARCH) as a good descriptor of the price instability in the 18 commodities under discussion
The estimated coefficients of the variance equation for every one of the commodities were found very significant at the 1 per cent level of significance, except for tobacco
Summary
Much empirical work has generated stylised facts that indicate that volatility, trends and cyclical behaviour are inherent salient features of primary commodity prices. Recent trends in primary commodity prices have in general been unfavourable for most exporters. Many reasons have been given for the long-term decline in prices. One of the important reasons for the long-term decline in trends, has been structural change in agricultural commodity markets. The fact that more than 50 per cent of SSA countries depend on up to three primary commodity exports for the greater share of their incomes (UNCTAD, 2003) makes commodity issues a subject of great concern. The behaviour of commodity prices assumes increased importance in implementing meaningful economic policies and developing hedging strategies
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