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Nonlinearities in the World Vegetable Oil Price System: El Nino Effects

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  • Ubilava, David
  • Holt, Matthew T.

Abstract

In this research we estimate the effect of El Nino Southern Oscillation (ENSO) over time on market dynamics for eight major vegetable oil prices. We estimate a system for vegetable oil prices by using a smooth transition vector error correction model (STVECM) to analyze impacts of ENSO events on production, and, more interestingly, their asymmetric nature. The results of estimated Exponential STVECM and Quadratic STAR models, respectively for the system of oil price equations and the ENSO variable regressions, suggest a smooth transition between ENSO regimes, and provide a better overall fit to the data than do linear models. Effects of the ENSO shock are analyzed using generalized impulse-response functions (GIRFs). The non-linear nature of these shocks is apparent, as the GIRFs are observed to be asymmetric depending on whether ENSO shocks are positive or negative. For most vegetable oil prices an ENSO shock has a permanent effect, meaning that prices advance to a new equilibrium level. Generally, a positive ENSO shock results in increased prices, and the opposite is true for the negative ENSO shock. The magnitude of the price change is largest for the coconut oil and palm kernel oil, and is the smallest for the ground nut oil. Also, it takes approximately two years for prices to stabilize at a new equilibrium level after the shock.

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File URL: http://purl.umn.edu/49360
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Bibliographic Info

Paper provided by Agricultural and Applied Economics Association in its series 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin with number 49360.

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Date of creation: 2009
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Handle: RePEc:ags:aaea09:49360

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Related research

Keywords: Smooth Transition; Vector Error Correction; El Nino Southern Oscillation; Vegetable Oil Prices; Demand and Price Analysis; Environmental Economics and Policy; Research Methods/ Statistical Methods;

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References

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  1. Ralf Brueggemann & Helmut Leutkepohl, 2000. "Lag Selection in Subset VAR Models with an Application to a U.S. Monetary System," Econometric Society World Congress 2000 Contributed Papers 0821, Econometric Society.
  2. Wolfram Schlenker & Michael J. Roberts, 2006. "Nonlinear Effects of Weather on Corn Yields ," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 28(3), pages 391-398.
  3. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
  4. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  5. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  6. In, Francis & Inder, Brett, 1997. "Long‐run Relationships Between World Vegetable Oil Prices," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 41(4), December.
  7. Allan D. Brunner, 2002. "El Niño and World Primary Commodity Prices: Warm Water or Hot Air?," The Review of Economics and Statistics, MIT Press, vol. 84(1), pages 176-183, February.
  8. Eitrheim, Øyvind & Teräsvirta, Timo, 1995. "Testing the Adequacy of Smooth Transition Autoregressive Models," Working Paper Series in Economics and Finance 56, Stockholm School of Economics.
  9. Hall, Anthony D. & Skalin, Joakim & Teräsvirta, Timo, 1998. "A nonlinear time series model of El Niño," Working Paper Series in Economics and Finance 263, Stockholm School of Economics.
  10. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  11. Temin, Peter, 2002. "Price Behavior in Ancient Babylon," Explorations in Economic History, Elsevier, vol. 39(1), pages 46-60, January.
  12. Letson, David & McCullough, B.D., 2001. "Enso And Soybean Prices: Correlation Without Causality," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 33(03), December.
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Cited by:
  1. Tack, Jesse B. & Ubilava, David, 2012. "The Effect of the El Nino Southern Oscillation on U.S. Corn Production and Downside Risk," 2012 Annual Meeting, February 4-7, 2012, Birmingham, Alabama 119785, Southern Agricultural Economics Association.
  2. Listorti, Giulia & Esposti, Roberto, 2012. "Horizontal Price Transmission in Agricultural Markets: Fundamental Concepts and Open Empirical Issues," Bio-based and Applied Economics Journal, Italian Association of Agricultural and Applied Economics (AIEAA), issue 1, April.
  3. David Ubilava, 2012. "El Niño, La Niña, and world coffee price dynamics," Agricultural Economics, International Association of Agricultural Economists, vol. 43(1), pages 17-26, 01.

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