A Vector Autoregressive Model of Wheat Prices
Can a farmer infer on the price of his crop simply by observing his own farm’s production process and the neighbouring fields?
Wheat is a staple constituent in dietary intake of most regions in the world. In the context of a surge in prices, major producers’ conflict and consumer apprehension, this study seeks to investigate the effect of commodity prices on wheat, mainly its substitutes, and those involved in its production process, oil and fertilizers. Indices are constructed to reflect these components, a cointegration analysis is conducted and a model is drafted. In doing so, this study aims to verify the no-correlation hypothesis of oil and wheat; whether the random walk hypothesis applies in this case; and the perfect market hypothesis of all information being incorporated into the price.
Data: World Bank Pink Sheet, Panel Time-series data
Model: Cointegration, VAR, VECM