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Multivariate Model for forecasting wheat prices in India

Multivariate Model for forecasting wheat prices in India

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Published by karjagi
Agriclinic and Agribusiness Centres - A Govt of India Project
Agriclinic and Agribusiness Centres - A Govt of India Project

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Published by: karjagi on May 25, 2009
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09/27/2011

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RESEARCH PAPER ONMULTIVARIATE MODEL FOR FORECASTING THE WHEAT PRICES IN INDIASUBMITTED TOCHIEF EDITOR, COMMODITY VISIONMCX CENTRE OF ECONOMIC RESEARCHLANDMARK-B, CHAKALA, ANDHERI (E), MUMBAI-93SUBMITTED BY;DR. RAJASHEKHAR KARJAGI, ASST MANAGER – CONSULTANCY; DR.RAOSAHEB MOHITE, ASSISTANT VICE PRESIDENT – CONSULTANCY; AND DR CHIRAGRA CHAKRABARTY, VICE PRESIDENT – TRAINING ANDCONSULTANCY, FT Knowledge Management Company Ltd., MUMBAI
 
Abstract
The study was carried out by FT Knowledge Management Company Ltd to assess the long-term trends inthe prices of wheat and factors affecting the wheat prices in India. The data on area, yield, production,beginning stocks, imports, exports, and domestic consumption was collected for the period from 1970-71to 2005-06 from USDA Production, Supply, and Distribution database. The data on CBOT daily prices havebeen extracted from MCX Meta stock software and the average annual price of wheat worked out and used for the analysis. Depending upon the suitability of the data the regression equations were fitted and forecasted individually and then the long-term forecasting was made by fitting a multiple regressionmodel. The results of the multiple regression indicated that Demand, MSP, and CBOT were affecting the prices of domestic wheat significantly. One year lagged response model was also used to predict theshort-term trends in prices of wheat. The predicted line is coinciding with the actual line and hence themodel is good.
Introduction
The present study attempts to develop an econometric model for both long-term andshort-term forecasting of wheat prices in India. The detailed methodology involved indeveloping the model and forecasting process can be understood in this paper. Theshort-term forecasting was studied by using lagged response model, where as thelong-term forecasting was made with the help of a multivariate model.
Methodology
The study was carried out to assess the long-term trends in the prices of wheat andfactors affecting the wheat prices in India. The investigation calls for data ondifferent variables which affect the prices of wheat in Indian markets. The data onarea, yield, production, beginning stocks, imports, exports, and domesticconsumption was collected for the period from 1970-71 to 2005-06 from USDAProduction, Supply, and Distribution database. The total consumption data includesboth the quantity consumed for the purposes of food and feed. The per capita foodconsumption was taken into account while estimating the total quantity of wheatconsumed for food purpose. However, the yearly data on average prices of wheat forIndia was available only for the period from 1979-80 to 2005-06 and hence theprevious prices were interpolated and included in the analysis. The data on CBOTdaily prices have been extracted from MCX Meta stock software and the averageannual price of wheat worked out and used for the analysis.
Selection of Model
 
In the beginning, all the selected variables were included in the model, but due tointerrelationship among the independent variables few variables have been clubbedand used for the analysis. The variables included in the model are: total supply, totaldemand, minimum support price, CBOT prices and area under wheat cultivation forthe whole study period. The total demand includes consumption for food and feedand export, whereas total supply includes imports, total production, and stocks heldby both government and private agencies.To assess the trends in different variables which affect the price of wheat, differentforms of equations were used, depending upon their suitability. The equations usedare as below:y=a+bt-c
t2
+d
t3
+ut - For trends in Prices ----------- (1)y=a+b
t
+u
t
- For Supply ------------------------ (2)y=a+b
t
+u
t
- For Demand ----------------------- (3)y=a+b
t
-c
t2
+d
t3
-e
t4
+u
t
- For MSP --------- (4)y=a+b
t
-c
t2
+d
t3
+u
t
- For Area ---------- (5)Where,y = Price, supply, demand, MSP and area for respective equationsa= Interceptb
t
, c
t2,
d
t3,
e
t4
=
 
Coefficientsu
t
= Stochastic term
Results and Discussion
The coefficients, standard errors of the corresponding coefficients, coefficient of determination, and significance of the model are presented in Table 1. The predictedvariables from the above equations were used to forecast the prices of wheat byusing a multivariate model of the following type:

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