Volatility Spill-over in a Customs Union: The Case of South Africa Sheep Import from Namibia

Prices guide economic agents’ resource allocation and output mix decisions. The extent of price transmission determines the nature of market integration. Volatility spill-over in spatially linked agricultural markets has been investigated, but not across borders. We developed an E-GARCH model which enabled us to explore various properties of price volatility – volatility persistence, asymmetric interference and volatility spill-over. We found the existence of significant volatility spill-over within the South African Customs Union (SACU) using sheep price data in Namibia and South Africa, especially with the introduction of Small Livestock Marketing Scheme (SLMS) in namibia. The results show more stickiness in the retail market than the wholesale market in South Africa (90% and 49%), suggesting a greater impact of price volatility on South Africa consumers than the processors. In terms of volatility spill-over, the asymmetric effect is significant at 5 percent suggesting that these two markets are somewhat integrated, since the incidence of volatility spill-over from Namibia has influenced price information transmission in the South African sheep market. Furthermore, 79 percent of the volatility in the Namibian market is transmitted through sheep meat retail prices to the South African sheep market. The measure of volatility persistence is significant; indicating that 45 percent of the volatility transmitted to the South African sheep market is persistent.