Agriculture Price Forecasting with Structural Break in Time Series Data

Abstract

Accurate price forecasting of agricultural commodities is very important for raising income of the farmers as well as for avoiding market risk. However, due to biological nature of production of agricultural commodities, forecasting of their prices become a challenging task. These challenges become more severe when structural breaks are present in the observed agricultural price series due to factors like major changes in technology, sudden changes in economic policy, etc. In this study, an effort has been made to account for the structural break along with the other complex patterns like non-stationarity, non-linearity, long memory and cointegration present in the agricultural price series.. Generally, single model may not be able to capture all complex patterns present in the data series concurrently. Therefore, to capture various complex patterns in the data along with structural break, hybridization of statistical model that account for structural break with artificial intelligence model has been done. Accordingly, for agricultural price volatility forecasting in the presence of structural break, a hybrid model based on Markov-Switching GARCH (MS-GARCH) and Extreme Learning Machine (ELM) is proposed. The performance of the proposed hybrid MS-GARCH–ELM model is evaluated on the weekly potato price of Delhi market, monthly international Groundnut oil and Palm oil price series, and it is found that the proposed model outperformed its counterparts. Empirical results of agricultural price series that contain long memory property with structural break show that the forecasting performance of the proposed hybrid model based on ARFIMA with dummy variable combined with ELM is better than the individual model. Further, the effect of structural break in the co-integrated system has also been evaluated. Accordingly, spatial market integration among major Potato markets in India are investigated in the absence and presence of structural break. The overall co-integration test results indicated that selected potato markets in India are well integrated and have long-run price association across them.