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 pricetransmission determines the nature of market integration. Volatility spill-over in spatially linkedagricultural markets has been investigated, but not across borders. We developed an E-GARCHmodel which enabled us to explore various properties of price volatility – volatility persistence,asymmetric interference and volatility spill-over. We found the existence of significant volatilityspill-over within the South African Customs Union (SACU) using sheep price data in Namibiaand 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 inSouth Africa (90% and 49%), suggesting a greater impact of price volatility on South Africaconsumers than the processors. In terms of volatility spill-over, the asymmetric effect issignificant at 5 percent suggesting that these two markets are somewhat integrated, since theincidence of volatility spill-over from Namibia has influenced price information transmission inthe South African sheep market. Furthermore, 79 percent of the volatility in the Namibian marketis transmitted through sheep meat retail prices to the South African sheep market. The measureof volatility persistence is significant; indicating that 45 percent of the volatility transmitted tothe South African sheep market is persistent.