Asymmetric price volatility transmission in remote food markets: Does it matter for domestic stabilization policies?

• Published date: 01 November 2020
• Author: Kiplimo Araap Lagat
• Date: 01 November 2020
• DOI: http://doi.org/10.1002/wfp2.12020

World Food Policy. 2020;6:157–175. wileyonlinelibrary.com/journal/wfp2

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157

© 2020 Policy Studies Organization

Received: 16 August 2020

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Revised: 8 October 2020

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Accepted: 8 October 2020

DOI: 10.1002/wfp2.12020

RESEARCH ARTICLE

Asymmetric price volatility transmission in

remote food markets: Does it matter for domestic

stabilization policies?

KiplimoAraap Lagat

Agricultural Economics & Resource

Management, School of Agriculture

and Natural Resources, Moi University,

Eldoret, Kenya

Correspondence

Kiplimo Araap Lagat, Agricultural

Economics & Resource Management,

School of Agriculture and Natural

Resources, Moi University, P.O. Box 3900-

30100 Eldoret, Kenya.

Email: kiplimoaraaplagat@mu.ac.ke

Abstract

In order to design better and effective domestic policies to

cope with extreme cases of food price volatility, policymak-

ers must understand the nature of market interconnectedness,

sources of domestic food price volatility, and the extent to

which price volatilities are transmitted within the domestic

markets. Incomplete food price volatility transmission sig-

nals price inefficiency and ineffectiveness in policy interven-

tion in stabilizing the domestic markets. The degree of price

volatility transmission can provide a broad assessment of

the extent to which markets are functioning in a predictable

way, and price signals are passing-through consistently be-

tween different markets. A multivariate generalized autore-

gressive conditional heteroskedasticity (MGARCH) model

was used to estimate the price volatility transmission within

and between the major (primary) and remote (secondary)

maize markets in Kenya. Mobile Vulnerability Analysis and

Mapping data collected real time by the World Food Program

in collaboration with the Ministry of Agriculture in Kenya

and other agencies were utilized. The average monthly data

series used covered the periods between January 2006 and

June 2019. Results confirmed significant differentiation in

volatilities between the remote and major food markets. The

major markets were found to be less volatile with strong

volatility transmission within the markets. In contrast, the

remote markets exhibited higher volatilities but with limited

volatility transmissions within the markets.

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ARAAP LAGAT

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INTRODUCTION

Global food price crisis of 2007–2008 forced many countries to revert to the prestructural adjustment

policy regimes to prevent transmission of world variability to the domestic food markets. Consequently,

most countries intervened by erecting barriers to agricultural trade to insulate the domestic markets

from international price variability. Public stockholding and trade policies were among the predom-

inantly reintroduced policies to stabilize domestic prices (Abbott,2012; Anderson & Nelgen,2012).

Notwithstanding the efforts, the effectiveness of these policies largely depends on the extent to which

the domestic markets are integrated. Correct price signal among the deficit and surplus markets will

be effectively transmitted if the domestic markets are strongly cointegrated (Froot etal.,1995).

Full price transmission and market integration are premised on the standard competition model, so

that in a frictionless undistorted world, the Law of One Price is supposed to regulate spatial price rela-

tions while pricing along production chains will depend exclusively on production costs (Rapsomanikis

etal.,2006). However, the puzzling phenomenon in developing countries is the existence of thin and

isolated rural food markets, leading to high variance in food prices and high covariance between an

individual and market supply, such that even in the presence of functional food markets, household's

food security can only be best assured by food self-sufficiency (Fafchamps,1992). Price transmission

process between the markets in these countries is largely conditioned by lagged and imperfect price

transmission, transaction costs, weak market integration, distortionary government policies, market

power, and informal cross-border trade (Abbott,2012; Akhter,2017). Increasing market integration

would, however, progressively diminish the need for food self-sufficiency by equalizing price move-

ments across a larger regional or international market and ensures existence of more responsive food

demand (Fafchamps,1992).

There exists a considerable body of literature examining price level and conditional volatility

transmission between agricultural commodity markets focusing on spatial and vertical price relations,

transmission from international to domestic markets, and conditional volatility spillovers between

different food and non-food commodity markets in sub-Saharan Africa (Abdulai,2000; Abidoye &

Labuschagne,2014; Ceballos etal.,2015; Hernandez etal.,2017; Kornher etal.,2017; Minot,2014;

Shively,1996). The main focus in recent research has been on the nature of volatility spillover effects

between the markets of different commodities in sub-Saharan Africa. The findings on price transmis-

sion across countries and commodities are substantively varied largely owing to differences in policy

effectiveness, government commitment, and the state of domestic market institutions (Abbott,2012).

Whereas demonstrable conclusions have been drawn on the existing cross-market volatility spillovers

and market interconnectedness, there is emerging evidence showing the existence of differentiation in

volatilities between the remote domestic food markets and major domestic food markets in developing

countries.

Minot (2014) found that food price volatility was lower in major cities than in remote cities and

higher in countries with the most active intervention to stabilize food prices. Moctar etal.(2015) also

found that the remote markets located far from major urban centers have the highest levels of price

volatility, and that the food-surplus markets and boarder markets experienced more volatile prices

than food-deficit and non-bordering markets. This phenomenon, where food price volatility is greatest

KEYWORDS

asymmetric volatility transmission, domestic stabilization policies,

Kenya, maize prices, remote food markets