G ain P ice Vola ili y in a Small Open Economy
MAURICE J. ROCHE
The Na ional Uni e si y o I eland, Maynoo h, Co. Kilda e, I eland.
KIERAN MCQUINN
Ru al Economy Resea ch Cen e, Teagasc, Dublin, I eland
Summa y
This pape uses a mul i a ia e ec o e o -co ec ion gene alized au o eg essi e condi ional
he e oscedas ici y model o in es iga e he e ec o B i ish g ain p ices on hei I ish
equi alen s. We ind ha in he long un he law o one p ice holds and in he sho un he
model cap u es he salien ea u es o I ish g ain p ices. The model is used o compu e
olling o ecas s o he condi ional means, a iances and co a iance o I ish g ain p ices one
yea ahead. We ind ha his model p oduces supe io o ecas s compa ed o hose based on
a commonly used me hodology o an au o eg essi e condi ional mean model whe e he
second momen s a e es ima ed using a ixed weigh mo ing a e age.
Keywo ds: G ain P ice Risk, Mul i a ia e GARCH
JEL classi ica ion: C32, F31, G15, Q14
Co esponding Au ho :
D . Mau ice J. Roche
Depa men o Economics,
Na ional Uni e si y o I eland, Maynoo h
Co. Kilda e, I eland.
Telephone: +353-(0) 1-7083786
Fax: +353-(0) 1-7083934
E-mail: Mau[email p o ec ed]
Websi e: www.may.ie academic economics
Acknowledgemen
We would like o hank Ge y Boyle (NUI Maynoo h), Tom Fla in (NUI Maynoo h) and
Paul Kelly (Teagasc, Dublin) o commen s on an ea lie d a . We assume ull esponsibili y
o any emaining sho comings. The esea ch was suppo in pa by Eu opean S imulus
Funds.
1. In oduc ion
The policy en i onmen acing Eu opean Union (EU) g ain p oduce s has unde gone
conside able change since 1992. The 1992 MacSha y e o ms o he EU’s Common
Ag icul u al Policy (CAP) educed g ain in e en ion p ices by 30 pe cen o e a h ee-yea
pe iod commencing wi h he 1993-1994 ma ke ing yea . The ecen Agenda 2000 e o ms
yielded a u he educ ion o 15 pe cen in g ain in e en ion p ices o e a wo-yea pe iod.
A p io i, one would expec ha his educ ion in gua an eed suppo p ices and he
consequen mo emen o in e nal EU g ain p ices owa ds equi alen wo ld p ices1 would
inc ease he ola ili y o he p ice se ies aced by he p oduce .2
The inc eased ele ance o unce ain y in he decision-making p ocesses o p oduce s has
led o adi ional supply esponse models being expanded o inco po a e p ice unce ain y.
Recen heo e ical esea ch by Coyle (1992) and Saha (1997) on he supply esponse o
p oduce s has adop ed he popula mean- a iance beha iou al pos ula e. In o de o apply
hese heo e ical models es ima es o he expec ed p ice, a iance and co a iance among
p ices o he commodi ies a e equi ed. Fo example, Oude Lansink (1999) applied hei
heo e ical me hodology o land alloca ion on Du ch a able a ms and p oduced he momen
es ima es ollowing he econome ic me hodology o Cha as and Hol (1990). The expec ed
p ice is ob ained using an AR(1) model and he expec ed a iances and co a iance o p ices
a e ob ained using a ixed weigh mo ing a e age. We a gue ha he Cha as and Hol
(1990) me hodology is oo ad hoc gi en he ac ha in he las i een yea s he e ha e been
many de elopmen s in he ime se ies li e a u e o he pu pose o es ima ing condi ional i s
and second o de momen s. In pa icula , he mul i a ia e gene alized au o eg essi e
condi ional he e oscedas ici y (MVGARCH) amewo k allows o he modeling o bo h he
ime a ying condi ional a iances and co a iances o p ices.
1
In he ligh o hese policy and me hodological de elopmen s, his pape seeks o answe
wo ques ions. The i s ques ion is wha a e he salien ea u es o he dynamics o I ish eed
ba ley and whea p ices pe onne? Gi en ha I eland is a small open economy we assume
he law o one p ice (LOP) holds be ween B i ish and I ish g ain p ices. We es he da a o
examine whe he he condi ional mean ela ionship be ween B i ish and I ish g ain p ices can
be cha ac e ized by a ec o e o co ec ion (VEC) model. The land alloca ion decision o
domes ic g ain p oduce s equi es no only he expec ed p ice bu also he expec ed a iance
and co a iance o domes ic eed ba ley and whea p ices. Thus he VEC model is expanded
o allow o he modeling o he ime a ying second momen s o domes ic eed g ain p ices
using a MVGARCH model. Ou indings indica e ha he es ima ed VEC-MVGARCH
model adequa ely desc ibes he dynamics o I ish eed ba ley and whea p ices using mon hly
da a om Janua y 1982 o Ma ch 2001.
The second ques ion is how well do he one-yea ahead o ecas s o he condi ional i s
and second momen s om he VEC-MVGARCH model compa e wi h hose gene a ed using
he Cha as and Hol (1990) me hodology? I ish g ain p oduce s ypically ha es in Augus -
Oc obe and plan whea in Oc obe . The e o e we use a a ian o he VEC-MVGARCH
model o compa e he one-yea ahead (Oc obe o he ollowing Sep embe ) olling o ecas s
o condi ional i s and second momen s o domes ic eed g ain p ices o he 1990-2000
pe iod wi h hose gene a ed using he Cha as and Hol (1990) me hodology. We es whe he
he e is a signi ican di e ence in hese o ecas s using Hansen’s (2001) ecen ly de eloped
es o supe io p edic i e abili y (SPA). The SPA es s indica e ha he VEC-MVGARCH
p oduces supe io o ecas s o hose p oduced using he Cha as and Hol (1990) me hodology
ega dless o whe he loss unc ions using ei he mean squa ed e o o mean absolu e
de ia ions a e employed.
2
The emainde o he pape is o ganized as ollows. In Sec ion 2 we desc ibe he VEC-
MVGARCH model o I ish eed ba ley and whea p ices based on he heo y o he law o
one p ice. The esul s and analysis is p esen ed in Sec ion 3. A inal sec ion o e s
conclusions.
2. Modeling he Mean and Vola ili y o I ish G ain P ices
I eland is a de ici p oduce o ce eals. Table 1 below de ails p oduc ion, domes ic use and
sel -su iciency a ios3 o I ish ce eals (ba ley, whea and oa s) o he c op yea s 1997-1998,
1998-1999 and 1999-2000. The sel -su iciency a ios o hese pe iods a e all less han one
hund ed pe cen . The exac coun y loca ion o impo ed ce eals is di icul o asce ain,
howe e o icial ade s a is ics ( om he I ish Cen al S a is ics O ice) e eal ha o e he
pe iod 1996-1999 almos se en y-six pe cen o impo ed whea was sou ced om B i ain.
T ade in o ma ion4 sugges s ha a simila p opo ion o ba ley impo s is also sou ced om
B i ain o e he same pe iod. The p esence o he bo de be ween No he n I eland and he
Republic and he esul ing con inuous low o ce eal ade adds u he c edence o he no ion
o he B i ish ce eal p ices being he chie de e minan o equi alen I ish p ices.5 Finally,
whils he assump ion o B i ish ce eal p ices being he main “d i e ” o I ish p ices is a
es able hypo hesis econome ically, da a on he ele an ag i-mone a y ela ionships be ween
I eland and o he EU s a es was no a ailable.6 Thus gi en ha I eland is a small open
economy we assume he law o one p ice (LOP) holds be ween B i ish and I ish g ain p ices.
The ela ionship be ween di e en in e na ional commodi y p ices o he same gene ic
p oduc a ac s conside able a en ion in he li e a u e. The LOP sugges s ha he only
di e ence in p ice o a homogeneous good be ween wo di e en ading blocs should be he
cos o anspo a ion be ween hese wo blocs. Any o he di e ences should in p inciple be
a bi aged away. Wi hin a Eu opean policy con ex a cen al ene o he CAP is he c ea ion
3
o a single, ba ie - ee ma ke in ag icul u al p oduc s. In heo y he p e alence o he LOP
indica es a ully in eg a ed ading ma ke .
In eali y many issues can dis o he LOP. In e na ional ma ke s a e o en slow o adjus
o new in o ma ion and o changes in local and global supply and demand condi ions due o
he signi ican lags associa ed wi h in e na ional commodi y ade. Consequen ly,
in e na ional p ice linkages may be impe ec and o a dynamic na u e. Policy ins umen s
can also dis o he ade o a gene ic p oduc . Disc epancies be ween ma ke and
ins i u ional exchange a es in he EU du ing he a ious di e en exchange a e egimes ha e
pe sis en ly lead o p icing anomalies be ween membe s a es.
In a B i ish and I ish con ex i was possible o sepa a ely speci y he MCA adjus ed
exchange a e be ween he wo coun ies and hus o es ima e he sepa a e e ec s o he
exchange a e as well as he B i ish p ice on he I ish p ice le el (see Da a Appendix o
de ails). In Figu es 1 and 2 we p esen he s e ling p ices o B i ish and I ish eed whea and
ba ley p ices. The I ish p ices a e adjus ed o mone a y compensa o y amoun s. The p ices
a e wholesale and a e mon hly co e ing he pe iod Janua y 1982 o Ma ch 2001. Whils
in e en ion p ices we e g adually lowe ed h oughou he ea ly 1990’s, g ain p ices
in e na ionally emained e y s eady because o g ow h in impo s om he so-called Asian
‘ ige ’ economies. The apid inancial down u n in hese economies allied o he collapse o
he Russian ma ke s in 1996-1997 p omp ed he all in g ain p ices wo ldwide o he la e
pa o he 1990s. These lowe p ices ha e pe sis ed in o he new cen u y. F om he igu es
i is appa en ha wi h ce ain excep ions B i ish and I ish p ices ack each o he qui e
closely.
The mean and s anda d de ia ion o I ish eed whea and ba ley p ice in la ion (a annual
a es) is p esen ed in Table 2. No e in pa icula he inc ease in he s anda d de ia ion o
whea and ba ley annual p ice in la ion be ween he 1982-1992 and he 1993-2001 ime
4

pe iods. The sample was spli in 1992 on he basis ha he CAP e o m o 1992 cons i u ed a
signi ican s uc u al b eak in he le el o ola ili y exis ing in commodi y p ices. The alues
o he s anda d de ia ion s ongly sugges an inc ease in he ola ili y o g ain p ices
be ween hese wo pe iods.
P ice ansmission analysis o ag icul u al commodi ies gene ally ocuses on he
in e na ional ansmission o he mean p ice. A s anda d app oach aken is o adop a ec o
au o eg ession o ec o e o co ec ion model o p o ide a clea e unde s anding o he
in e ela ionships be ween di e en p ice le els. Mos s udies hus conce n hemsel es solely
wi h he ela ionship be ween he le els o mean alues o he p ice se ies. Examples in he
ag icul u al li e a u e include A deni (1989), Goodwin and Sch oede (1991), Mohan y e al.
(1995), Diakosa as (1995), Mohan y e al. (1996), and Ghosh ay, Lloyd and Rayne (2000).
In gene al hese s udies conduc p elimina y analysis on he ele an p ice se ies o he
p esence o a uni oo and subsequen ly use coin eg a ion echniques o examine he na u e
o he ela ionship be ween he di e en p ice se ies.
The e ha e been many s udies on he ime se ies p ope ies o second momen s using
uni a ia e GARCH models in he ag icul u al economics li e a u e. The di e en policy
egimes wi hin US ag icul u e ha e p omp ed s udies o he e ec s o a ious di e en
go e nmen p og ams on ola ili y in commodi y p ices (see o example C ain and Lee
(1996)). The use o GARCH models in he con ex o commodi y goods analysis has
inc eased conside ably o e he pas en yea s. Mos o his analysis has been concen a ed
on he US ma ke 7. An ea ly example is an analysis o isk in he U.S. b oile sec o by Hol
and A adhyula (1990). Yang and B o sen (1992) use GARCH analysis in add essing
nonlinea i ies in he daily cash p ices o se en di e en ag icul u al commodi y p ices.8 Hol
(1993) adop ed a GARCH in Mean model o in e ela i e isk p emia in U.S. bee ma gins.
McKenzie and Hol (1998) used GARCH and ARCH in Mean models o examine ma ke
5
e iciency in ag icul u al u u es p ices. Wea e and Na che (2000) using a uni a ia e
GARCH model analyse he e ec o changes in US ma ke condi ions p ecipi a ed by
changes in US a m p og ammes on he ola ili y o ag icul u al p ices.
Despi e he ac ha he use o GARCH models in ag icul u al esea ch has inc eased
conside ably o e he las decade many s udies on he in e na ional ansmission o
ag icul u al p ices ypically igno e ha he condi ional a iance (and co a iances) o he p ice
se ies could be ime a ying. In a no able con ibu ion, Na che and Wea e (1999) no e ha
while he li e a u e is signi ican ly de eloped in measu emen s o p ice ola ili y in
ag icul u al ma ke s, “less wo k has add essed he issue o empo al and spa ial ansmission
o ola ili y”. Wi h he clea inc ease in he ola ili y o in e na ional commodi y p ices
aced by p oduce s, he e is a need o adop mo e ad anced ime-se ies econome ic
echniques in he analysis o commodi y p ice ansmission ela ionships. The e is a small
bu g owing li e a u e applying mul i a ia e condi ional i s and second momen models o
s udy in e na ional p ice ansmission simul aneously (see o example, Dawson e al. (2000);
Haigh and B yan (2001); Jumah and Kuns (2001)).
Ano he impo an eason o he modeling o he second momen s o commodi y p ices
lies in he inc eased popula i y o p oduc ion models unde p ice and ou pu unce ain y (see
o example, Coyle (1992); Coyle (1999); Oude Lansink (1999); Boyle and McQuinn
(2001)). These models ypically equi e he speci ica ion o he mean, a iance and
co a iance o compe ing p oduc p ices. All o hese p oduc ion models unde unce ain y
use he me hodology o Cha as and Hol (1990) o es ima e he condi ional means, a iances
and co a iances o commodi y p ices.
We sugges ha he condi ional mean o I ish g ain p ices could be es ima ed using a
VEC model and he condi ional co a iance ma ix could be es ima ed using an MVGARCH
model. The VEC model imposes he LOP in he long un. The hypo hesized ela ionship is
6
ha I ish g ain p ices a e mainly de e mined by he espec i e B i ish g ain p ice and he
exchange a e be ween he wo coun ies. Gi en he ‘small open economy’ na u e o he I ish
g ain sec o hese explana o y a iables a e assumed o be exogenous. The esea che does
no ha e o impose any a p io i es ic ions on he expec a ions mechanism. The condi ional
means o I ish whea and ba ley p ices a e es ima ed using
()
()
3
12
56
4
11 2 31 41 100
11 2 31 41 100
−−−−−
== =
−−−−−−
== =
Δ= −−− − + Δ+ Δ+ Δ+
Δ= −− − − + Δ+ Δ+ Δ+
∑∑∑
∑∑∑
m
mm
wi w wi w w w wuk w w wi w wuk w w
i ii ii i
ii i
mm
m
bi b bi b b b buk b b bi b buk b b
i ii ii i
ii i
−
p
p peppe
pp pe p p eu
u
αββββ δ γ θ
αββββ δ γ θ
()
0[u ]~ , H
⎡⎤
=
⎢⎥
⎢⎥
⎣⎦
w
b
MN
u
u
(1)
The se ies pwi is he p ice o MCA adjus ed I ish eed whea , pwuk is he p ice o B i ish eed
whea , e is he pun /s e ling exchange a e, pbi is he p ice o MCA adjus ed I ish eed ba ley,
pbuk is he p ice o B i ish eed ba ley, is a ime end and he ui a e s ochas ic e o e ms.
All a iables a e in loga i hms. The exp essions in b acke s a e e o co ec ion e ms
ep esen ing de ia ions om he LOP. The mi a e he numbe o g ow h a iables ha a e
added as explana o y a iables in he VEC model and a e de e mined by using a combina ion
o minimizing Bayesian In o ma ion C i e ion (BIC) and ensu ing ha he esiduals a e whi e
noise. The condi ional co a iance ma ix, H , is es ima ed ollowing Baba e al. (1991) and
Fla in and Wickens (2001) using he ollowing MVGARCH(1,1) model
(
)
(
)
11 1−− −
′′ ′′ ′ ′
=+ − + −
HCCBuu CCBAH CCA
(2)
In (2) A, B and C a e 2x2 ma ices. Equa ion (2) has he ad an age ha H is gua an eed o
be posi i e de ini e. A and B a e ull symme ic ma ices and C is a lowe iangula ma ix.
C′C gi es he long- un condi ional co a iance ma ix o he mon hly g ow h a e o I ish eed
ba ley and whea p ices. The pa ame e s in A and B cap u e he impo ance o sho - un
de ia ions in he condi ional co a iance ma ix om he long- un alues. Unde he
7
assump ion o condi ional mul i a ia e no mali y he model (1)-(2) can be es ima ed by
maximum likelihood o quasi-maximum likelihood me hods.
3. Resul s and analysis
We p esen ou analysis in ou subsec ions. The VEC model we es ima e equi es ha all
a iables be in eg a ed o o de one. In Sec ion 3.1 we in es iga e he ime se ies p ope ies
o he a iables o in e es . The LOP imposes a long- un coin eg a ing ela ionship be ween
I ish and B i ish p ices and he exchange a e be ween he wo cu encies. The coin eg a ion
analysis is p esen ed in Sec ion 3.2. Equa ions (1)-(2) a e es ima ed and analysed in Sec ion
3.3. We use his model o o ecas I ish g ain p ices one-yea ahead. These a e compa ed o
benchma k o ecas s using he me hodology o Cha as and Hol (1990). The esul s a e
p esen ed in Sec ion 3.4.
3.1 Uni oo analysis
We es ed he B i ish and I ish eed ba ley and whea p ices and he pun /s e ling exchange
a e o uni oo s using a a ie y o uni oo es ing p ocedu es. In all o he uni oo es s
app op ia e lag leng hs o he adjus men pa ame e s a e chosen by educ ion me hods.9 A
end e m was added o all es eg essions o g ain p ices as hey ha e a no iceable
downwa d end o e he pe iod. The esul s a e epo ed in Table 3. The s anda d
augmen ed Dickey and Fulle (1981) (ADF) uni oo es would sugges ha all se ies a e
in eg a ed. Howe e his es lacks powe . Maddala and Kim (1998) sugges ha wo
modi ied ADF es s; one de eloped by Ellio e al. (1996) and he o he a weigh ed
symme ic es de eloped by Pan ula e al. (1994) ha e mo e powe han he basic ADF es .
Howe e hese wo uni oo es s sugges ha he se ies a e also nons a iona y. Gi en ha
he e we e majo CAP e o ms in 1992 and 2000 we also pe o med some es s whe e he
8
ime pe iod could be used as an ac ual measu e o ola ili y13. We calcula e he a iance and
co a iance o g ain p ices using he in e ening wel e mon hs and compa e hese o he
es ima ed condi ional o ecas s.
The MSE and MAD c i e ion a e p esen ed in Table 7. Ou sugges ed model p oduces
o ecas s wi h lowe loss unc ions han o ecas s made using he Cha as and Hol (1990)
me hodology. In o de o es whe he he di e ence is signi ican we use a ecen ly
de eloped es o supe io p edic i e abili y (see Hansen (2001) o a ho ough discussion)14.
C i ical alues a e gene a ed using boo s ap me hods. The SPA es s o he bes
s anda dized o ecas ing pe o mance ela i e o he benchma k model. The null hypo hesis
is ha none o he compe ing models is be e han he benchma k. We de ine he Cha as and
Hol (1990) model as he benchma k. The p- alues o he SPA es s a e p esen ed in Table 7
and indica e ha he VEC-MVGARCH p oduces supe io o ecas s a he 5% signi icance
le el in some cases and a he 10% signi icance le el in nea ly all he cases. This esul does
no depend on whe he loss unc ions using ei he mean squa ed e o o mean absolu e
de ia ions a e employed.
4. Conclusion
This pape has sough p ima ily o add ess he ques ion o in e na ional p ice ansmission
be ween I ish and UK eed g ains wi hin an inc easingly ola ile clima e o commodi y
p ices. The adi ional model o p ice ansmission (VEC) has been expanded in his case o
allow o ime a ying condi ional a iances and co a iances amongs he I ish p ice se ies
modelled. S anda d LM- es s ailed o ejec he hypo hesis o ARCH e o s in he s anda d
VEC amewo k. The e o e allowing o mul i a ia e ARCH e o s imp o es he e iciency
o he es ima ed pa ame e esul s. In e es ingly, he pe iod o mos signi ican ola ili y
appea s o ha e been p io o 1993 and no subsequen ly as had o iginally been hypo hesized.
15

As his ola ili y is condi ional, his esul may ha e been due o ade dis o ions owing o
he di e ences, which occu ed be ween g een and ma ke exchange a es. F om 1993 on,
g een a es we e aligned on he ma ke a e he eby emo ing his po en ial o dis o ion and
pe mi ing UK g ain p ices o mo e accu a ely cap u e mo emen s in equi alen I ish p ices.
The modeling o a iances and co a iances o p ice se ies is also an impo an
de elopmen pa icula ly in he con ex o he inc eased ole played by unce ain y in
p oduce ’s decision-making p ocesses. Inc easing numbe s o in e na ional s udies a e
including exp essions o he a iances and co a iances o p ices as mo i a ed by second
momen s unce ain y models. To da e, many o hese momen s o ecas s ha e been gene a ed
by use o he Cha as and Hol (1990) me hodology whe e he ela i e e ec s o pas
a iances and co a iances on p oduce decision making a e assumed by he esea che .
Th ough use o he MVGARCH componen o he model es ima ed in his pape , hese
ela i e e ec s a e de e mined en i ely by he da a. The o ecas s om he VEC-MVGARCH
model a e hen compa ed wi h hose achie ed wi h he Cha as and Hol me hodology using
app oaches de ised by Hansen and Lunde (2001) and Hansen (2001). The o ecas s achie ed
wi h he VEC-MVGARCH app oach ou pe o m hose o he Cha as and Hol (1990)
app oach in all cases a he 10% le el and in mos cases a he 5% le el.
Da a Appendix
The I ish p ices and exchange a es we e ob ained om mon hly bulle ins o he I ish Ce eals
Au ho i y (CAI) whils he UK p ices we e ob ained om he UK's Home G own Ce eals
Au ho i y (HGCA). Mone a y compensa ion amoun s (MCAs) we e in oduced o
compensa e p oduce s o un a o able changes in hei coun y's g een a es. These amoun s
we e applied a a coun y's on ie whe e hey ac ed as a ax on expo s om coun ies whe e
a m p ices we e being kep low and a subsidy on hose whe e p ices we e being kep high.
16
The MCAs we e o be phased ou by g adually aligning he g een a es on he ma ke
exchange a es. The applica ion o he MCA sys em a he in e nal on ie s o he
Communi y was incompa ible wi h he in oduc ion o he Single Ma ke on he 1 Janua y
1993. Wi h he in oduc ion o he Single Ma ke , g een a es we e aligned on mone a y
a es, which esul ed in only small mone a y gaps. Thus MCAs we e emo ed. The ele an
MCA amoun s we e again ob ained om he CAI’s mon hly bulle ins.
Re e ences
A deni, P.G. (1989). Does he law o one p ice eally hold o commodi y p ices? Ame ican
Jou nal o Ag icul u al Economics 71: 661-69.
Baba, Y., Engle R.F., K a D.F. and K one K.F. (1991). Mul i a ia e simul aneous
gene alized ARCH, Depa men o Economics, Uni e si y o Cali o nia, San Diego,
unpublished manusc ip
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20

Table 1. Ce eals supply balance
Yea Usable P oduc ion Domes ic Use Sel -Su iciency
000 onnes %
1997-1998 1,964 2,204 88
1998-1999 1,865 2,285 82
1999-2000 2,011 2,545 79
Sou ce: The I ish Cen al S a is ics O ice (CSO) 2002.
21
Table 2. Basic s a is ics o annual g ow h a es in whea and ba ley p ices
Mean 1982:01-1992:12 1993:01-2001:03 1982:01-2001:03
I ish Whea P ice 2.15 -5.84 -1.46
B i ish Whea P ice 0.74 -7.09 -2.80
I ish Ba ley P ice 2.61 -5.90 -1.24
B i ish Ba ley P ice 0.77 -6.05 -2.31
S anda d De ia ion
I ish Whea P ice 9.24 12.68 11.61
B i ish Whea P ice 7.59 13.30 11.23
I ish Ba ley P ice 9.50 12.41 11.68
B i ish Ba ley P ice 6.01 13.24 10.50
No e: B i ish whea and ba ley p ices a e ob ained om HGCA. I ish whea and ba ley p ices
a e ob ained om he CAI. The I ish p ices a e adjus ed o mone a y compensa o y amoun s
and con e ed o s e ling.
22
Table 3. Uni oo es s o whea and ba ley p ices and he s e ling/pun exchange a e
I ish Whea
P ice I ish Ba ley
P ice UK Whea
P ice UK Ba ley
P ice Exchange
Ra e
Non-seasonal
ADF -1.73 -2.03 -1.51 -1.41 -1.17
ADF-GLS -2.58 -3.09 -1.76 -1.61 -2.13
W d. Sym. -2.65 -3.25 -1.61 -1.52 -1.95
F anses π1-2.56 -3.00 -0.78 -0.59 -1.49
B eaking end
Zi o -And ews A -4.32 -5.17a-4.34 -4.29 -3.32
Zi o -And ews B -4.24 -3.80 -4.05 -4.35
Zi o -And ews C -4.88a-5.40a-4.46 -4.46
Pe on A -4.32c-5.14a,c -4.34c-4.29c-3.32c
Pe on B -4.23 -3.76 -4.05 -4.35
Pe on C -4.89a,c -5.37a,c -4.46c-4.46c
Seasonal
F anses π2-4.96b-3.69b-2.67 -2.87 -3.71b
F anses π3-π12 72.53b10.43b9.03b9.29b6.94b
No e: B i ish whea and ba ley p ices a e ob ained om HGCA. I ish whea and ba ley p ices
a e ob ained om he CAI. The I ish p ices a e adjus ed o mone a y compensa o y amoun s
and quo ed in pun s. A cons an and end we e included in he es eg essions o he p ice
se ies. A cons an was included in he es eg essions o he exchange a e se ies. In all o
he uni oo es s app op ia e lag leng hs on he adjus men pa ame e s a e chosen by
educ ion me hods using a 10% le el o signi icance.
a deno es signi icance a he 5% le el.
b deno es signi icance a he 1% le el.
c coe icien on he pulse dummy a iable in he Pe on (1997) es s is insigni ican a he 1%
le el.
ADF is an augmen ed Dickey-Fulle uni oo es .
ADF-GLS is a uni oo es om Ellio , Ro henbe g and S ock (1996).
W d. Sym is a weigh ed symme ic uni oo es om Pan ula, Gonzalez-Fa ias and Fulle
(1994).
F anses π1 is a non-seasonal uni oo es om F anses (1998).
The Zi o and And ews (1992) es s A, B and C a e es s o he uni oo null hypo hesis
e sus al e na i es o b eaking in e cep , b eaking slope and b eaking in e cep and slope
espec i ely.
The Pe on (1997) es s A, B and C a e es s o he uni oo wi h a single b eak null
hypo hesis e sus al e na i es o b eaking in e cep , b eaking slope and b eaking in e cep
and slope espec i ely.
F anses π2 and π3-π12 a e non-seasonal uni oo es s om F anses (1998).
23
Table 4. P obabili y alues o coin eg a ion es s
I ish Whea P ice
Coin eg a ing Reg ession I ish Ba ley P ice
Coin eg a ing Reg ession
Hansen (1992a) - LC 0.08 0.13
Hansen (1992a) - MeanF 0.15 0.20
Hansen (1992a) - SupF 0.09 0.20
Engle-G ange (1987) 0.00 0.00
No e: The Hansen (1992a) es s a e o pa ame e s abili y based on he ully modi ied
es ima ed coin eg a ing eg ession. The LC and MeanF es o a g adual change in he
coe icien s and he SupF es s o a swi change. The app op ia e p- alues a e ob ained om
Hansen (1992a). The Engle-G ange (1987) coin eg a ion es s a e based on he esiduals o
ully modi ied es ima ed coin eg a ing eg ession. The app op ia e p- alues a e ob ained
om MacKinnon (1994).
24
Condi ional Va iances o I ish Feed Whea P ices
0
20
40
60
80
100
120
140
1983:02 1986:02 1989:02 1992:02 1995:02 1998:02 2001:02
Sho Run Long Run
Figu e 4. The sho and long un condi ional a iance o I ish eed whea .
31

Condi ional Va iances o I ish Feed Ba ley P ices
0
5
10
15
20
25
30
35
40
45
50
1983:02 1986:02 1989:02 1992:02 1995:02 1998:02 2001:02
Sho Run Long Run
Figu e 5. The sho and long un condi ional a iance o I ish eed ba ley.
32
Condi ional Co a iance be ween o I ish Whea and Ba ley P ices
-60
-50
-40
-30
-20
-10
0
10
20
1983:02 1986:02 1989:02 1992:02 1995:02 1998:02 2001:02
Sho Run Long Run
Figu e 6. The sho and long un condi ional co a iance be ween I ish eed whea and ba ley.
33
Endno es
1 The mos ecen se o p ojec ions o in e nal EU p ices by he Food and Ag icul u al
Policy Resea ch Ins i u e (FAPRI) a he Uni e si y o Missou i illus a e he deg ee o which
in e nal EU g ain p ices a e con e ging wi h equi alen wo ld p ices o he 2001-2010 ime
pe iod.
Mo e in o ma ion on FAPRI-Missou i is a ailable online a h p://www. ap i.missou i.edu/.
2 These e o ms also saw he in oduc ion o di ec aid paymen s o he a able sec o . The
o e all e ec o he wo EU e o ms on he a iabili y o o al p oduce income is somewha
complica ed by he in oduc ion and subsequen inc ease in he le els o compensa o y
paymen s paid ou o p oduce s. As he p oduce need only plan he ce eal in o de o claim
hese paymen s, he amoun ecei ed is impe ious o ei he p ice o yield unce ain y and as
such cons i u es a ela i ely “ iskless” componen o o e all p oduce income. Howe e one
can a gue ha as hese compensa ion paymen s a e he same ac oss all g ains, he le el and
a iabili y o he ma ke e u n will be o inc eased impo ance in he plan ing decision made.
3 Sel -su iciency a io = P oduc ion/ Domes ic Use
4 Ce eals Associa ion o I eland (CAI) Mon hly Ma ke In elligence Bulle in and USDA
A aché Repo s.
5 A se ies o wo kshops es ablished o he pu poses o he FAPRI-I eland g ains model
a ended by many leading echnical and indus y expe s wi hin he I ish g ain sec o
p o ided e y s ong anecdo al e idence o such a speci ica ion. Fo mo e in o ma ion on
he FAPRI-I eland pa ne ship see h p://www. ne . eagasc.ie/ ap i/use ulinks.h m
6 In pa icula , ma ke exchange a es and Mone a y Compensa ion Amoun s (MCA) we e
a ailable on a mon hly basis o ade be ween I eland and he UK.
7 Loy and Wea e (1998) being a no able excep ion.
8 Co n, po k bellies, soybean, soybean meal, soybean oil, suga and whea .
9 The numbe o lags in all o he uni oo es s is de e mined by a -s a is ic g ea e han 1.64
on he las coe icien on he lagged changes o he se ies in he es eg ession.
10 Applying a simila uni oo es ing p ocedu e o he i s di e ences o all i e se ies
sugges s ha he i s di e ences a e s a iona y. These esul s a e a ailable om he au ho s
upon eques .
11 The app op ia e p- alues a e ob ained om Hansen (1992a).
12 The app op ia e p- alues a e ob ained om MacKinnon (1994).
13 Hansen and Lunde (2001) e alua e condi ional a iance o ecas s om a a ie y o
GARCH ype models o daily Deu chma k/US Dolla exchange a e and IBM s ock p ices
using ealized ola ili y calcula ed using in a-day e u ns.
14 The au ho s would like o hank Pe e Hansen o supplying Ox code ha calcula es he
SPA es s a is ics and associa ed p- alues.
34