Statistical Analysis of Price Volatility of Agricultural Commodities Traded at the Ethiopian Commodity Exchange (ECX) Using Multiplicative GARCH-MIDAS Two-component Model

Teshome Hailemeskel Abebe, Emmanuel Gabreyohannes Woldesenbet and Belaineh Legesse Zeleke

Global Business Review, 2022, vol. 23, issue 4, 925-945

Abstract: We applied multiplicative GARCH-MIDAS two component models for price return volatility of selected commodities traded at the Ethiopian commodity exchange (ECX). Unlike the ‘traditional’ generalized autoregressive conditional heteroscedasticity (GARCH) family models, GARCH-MIDAS component model can capture the time-varying conditional as well as unconditional volatilities, and accommodates macroeconomic variables observed at different frequencies through mixed interval data sampling (MIDAS) specification. The results of our specification tests revealed the existence of both time-varying conditional and unconditional variance. The fitted GARCH-MIDAS component models showed that realized volatility, inflation rate and fuel oil price have had an increasing effect on the price volatility of the commodities under consideration, while real effective exchange rate (REER) had the opposite effect. Furthermore, mean square error (MSE), mean absolute error (MAE) and Diebold and Mariano (DM) test were used for evaluating and comparing the forecasting ability of GARCH-MIDAS component models against standard GARCH models. The results revealed that GARCH-MIDAS component models outperformed the standard GARCH model for high-frequency data.

Keywords: Price volatility; GARCH model; GARCH-MIDAS component model; short-term volatility component; long-term volatility component (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:sae:globus:v:23:y:2022:i:4:p:925-945

DOI: 10.1177/0972150919895628

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