Iris Publishers - World Journal of Agriculture and Soil Science (WJASS)

Modelling the Relationship Between Agricultural Commodity Prices, Energy Prices, And Exchange Rate: Evidence from A Three Stage Markov-Switching Model

Authored by Yegnanew A Shiferaw



Commodity price volatility originating from excessive commodity price fluctuation has been a global problem, especially after the recent financial crises. Commodity prices are categorized by periods of sharp fluctuations in prices, and the level of volatility itself changes over time [1]. Interest rises on modelling and analyzing the dynamic behavior of financial quantities observed through time after the groundbreaking papers by Engle [2] and Bollerslev [3]. However, there are changes on financial and macroeconomic quantities in their behavior over a sample period. Financial crises can cause dramatic fluctuations in the behavior of many economic time series [4]. They can also abruptly change the government policy. Markov Switching models have been presented to consist of sudden parameter changes in models. The idea is to add a hidden state variable which shows changing the parameter when the process is in a different state.

Since the seminal application of Hamilton [5] to US real Gross National Product growth, regime switching models have been wide ly used in applied research. The model has been applied in various areas of economics and finance such as analysis of business cycles [5], low and high volatility regimes in returns [6], oil and the macroeconomic analysis [7], asset and stock market returns modelling [8] and so on.

 

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