Nonlinearities in the price behavior of dairy products

Abstract

Commodity futures risk premiums vary across commodities and over time depending on the level of physical inventories, as predicted by the Theory of Storage. The interaction of the factors related to the inventories and other financial sources result in a complex futures' price behavior especially in the case of dairy products. This behavior has been surveyed and described with non linear testing and modeling respectively within the last decades. The same process has been used to describe the formation of commodity prices. In the present study a number of univariate tests confirm the existence of nonlinearity in the dairy futures price formation, while a Mackey GARCH model is used to describe the returns' behavior. This model selection is based upon the consideration of the mean process as dynamic chaotic. The particular model provides us with a useful tool in making forecasts of a commodity price in the short run but certainly not in the long run. © 2011 Kavala Institute of Technology.