Modelling and Predicting Volatility in Essential Food Prices Using ARIMA-GARCH Models

Abstract

The volatility of food prices poses significant challenges to food security, particularly in developing countries. Sudden changes in the prices of essential commodities, driven by factors such as climate change, market disruptions, and economic policies, can lead to economic instability and food insecurity. In Indonesia, significant fluctuations in staple commodity prices like rice, eggs, beef meat, chicken meat, chili, and sugar have been observed, influenced by climatic conditions, harvest yields, and import policies. Understanding these volatility patterns is crucial for effective policy formulation and economic planning. ARIMA and ARCH-GARCH models have been widely used to analyze food price volatility, demonstrating effectiveness in capturing price fluctuations in various agricultural commodities. This research aimed to model and predict the volatility of essential food prices in Indonesia using ARIMA-GARCH models. The study found that ARIMA models were suitable for chili (ARIMA(4,1,0)), eggs (ARIMA(0,1,3)), beef meat (ARIMA(5,2,0)), chicken meat (ARIMA(3,1,0)), and rice (ARIMA(2,1,0)), while the GARCH(1,1) model was the most appropriate for predicting sugar prices. Diagnostic tests indicated that while the ARIMA models fit the data well, residuals for most commodities showed significant deviations from normal distribution, suggesting potential heteroskedasticity. However, only sugar exhibited ARCH effects, indicating the need for GARCH models. High error metrics for chili and sugar suggest the need for more sophisticated modelling techniques, whereas lower errors for beef meat, chicken meat, and rice indicate more stable price patterns. These findings emphasize the importance of refining forecasting models, incorporating additional variables like weather conditions and policy changes, and exploring advanced models for high-volatility commodities. Regular monitoring and evaluation of models, coupled with stakeholder engagement, are crucial for managing price volatility and ensuring food security in Indonesia.