The analysis of wheat prices using multiple structural breakpoint co-integration test

Abstract

From 2005 to 2008, high volatility in the markets affected grain prices significantly. This high volatility in grain prices made many researchers curious, and many discussions aroused from this topic. This study analyzes wheat price behavior during this period of high volatility. We estimate a return index for wheat using spot and futures wheat prices with the help of a present value model. To analyze the cointegration between the wheat prices and return index, a new co-integration test with multiple structural breaks, developed by Daiki Maki (2012), is used. The long-run cointegration coefficients are estimated using the Dynamic Ordinary Least Squares methodology. The empirical results show that there is cointegration between the spot and futures wheat prices, which tends to change at breakpoints. In other words, there is an equilibrium relation between spot prices and futures prices; however, it becomes unstable during the crisis in 2008. The results may help in understanding the dynamics of wheat prices, especially during high-volatility periods.

The Impact of Monetary Policy, Transport Costs and Substitute Prices on the Australian Wheat Futures Market Price

“…Jian Yang and David J. Leatham analysed the U.S. wheat futures market and found that in the long run, wheat futures market prices are relatively balanced and there is no price convergence in the wheat futures markets of different countries [6]. Cinar, Gokhan's study shows that there is a cointegration relationship between spot and futures prices of wheat, in other words, there is an equilibrium relationship between them [7]. When it refers to the Australian futures market, Turkington, J & Walsh, D study tells us that electronic markets have enhanced price discovery in the current environment, but price discovery is still very slow.…”