MODELING AND FORCASTING THE EXPORT PRICE VOLATILITY OF LEATHER AND LEATHER PRODUCTS IN ETHIOPIA

Abstract

Leather is one of the most widely traded commodities in the world. Trades in foreign sales are also important in the forecasting of the overall growth of a country. Ethiopia is known in the international leather market for its superior qualities of sheep and goatskin, acknowledged as being the best in the world. The primary objective of this study was modeling and forecasting the volatility of the export price of leather products in Ethiopia. The data in this study used were the monthly export price of leather products, exchange rate, interest rate, fuel oil price, food and non food inflation rate from January 2010- December 2019 G.C obtained from NBE, ERCA. The return price of leather products has the characteristics of volatility clustering, leptokurtosis and leverage effect. Thus, the ARIMA family model for the mean equation and GARCH family model for variance equation was used to model the export price volatility of leather products in Ethiopia. Among GARCH family models for this study, ARMA (3, 3)-GARCH (3, 0) with student tdistributional assumption of residuals were found the better fit the model for export price volatility of leather products in Ethiopia.Exchange rate fuel oil price and non food inflation rate have a statistically positive significant effect on the volatility of the export price of leather and interest rate and food inflation rate have no significant effect on the volatility of the export price of leather products. The out-of-sample forecast indicates a constantly increasing trend in almost all time considered in the study period and seems to decrease in the first quarter of 2018 up to the end of 2019