Risk Spillover Effect of Exchange Rate on Chicken Market and its Major Inputs in Iran

over the previous years, with development and expansion of broiler breeding units and its increasing production, chicken meat has become an essential commodity in the household food basket and has been attributed as one of the most important sources of protein supply for households. Recently, the chicken market pricing as well as exchange rate volatility has become one of the issues in that industry. One of the main sources of this risk in the chicken market is the exchange rate volatility, which affects the imported inputs markets.   The current analysis is based on 21 years of monthly data on exchange rate, chicken price, corn price, soybean meal price and fish powder price over the period 1995-2016 obtained from the Central Bank of the Islamic Republic of IRAN and Livestock Support Company of Iran. In present study, the risk of overflow between the exchange market and the chicken market and its major import inflows are examined. Estimation has been carried out using GARCH-type models, based on the multi variation GARCH (MV-GARCH), for both the extreme downside and upside Value-at-Risks (VaR) of exchange rate volatility risk and chicken market and its major inputs markets. It depicts market risk by means of the probability distribution of a random variable and evaluates the risk with a single real number. While the VaR method is used to measure extreme market risk, as the risk interaction and spillover effect among different markets is apparent. Furthermore, according to a new concept of Granger causality in risk, a kernel-based test is proposed to detect extreme risk spillover effect between two mentioned markets. The methodology used is Granger causality in risk provided by Hong (2001) and Hong et al. (2003). It requires that the time-varying VaR to be evaluated for each return, and then it should be determined if the historical information about risk in one market increases one's ability to forecast its occurrence in another market in terms of Granger causality concept.   According to the results of the Dickey-Fuller unit root test, all variables are stationary at first difference, and based on the results of the seasonal unit root test, seasonal behavior pattern in variables has been found. Then volatility clustering was confirmed by testing heterogeneity of conditional variance. Since the results showed cluster fluctuations in the variables, we evaluated the MGARCH and TGARCH models and then we used VaR to estimate the value series at risk for all variables. The result of VaR section showed that the upside risk of chicken and Fish powder is the highest, and soybean meal and exchange rate having the least risk. In the downside risk chicken and fish powder were known as the most risky markets, corn and exchange rate as least risky. But it is fascinating about the exchange rate that it has a higher upside risk than the downside risk. In other words, there is a greater risk for an increase in the exchange rate market. Finally, the relationship between risks of markets was investigated using risk granger causation. The results indicated that there are over and over additional risks for traders in all of these markets and there is a significant risk spillover between the exchange market and the chicken market and its major inputs markets, the severity of upside spillover is higher than the falling price of the exchange rate. There is a significant risk spillover between the chicken market and its major inputs market at the 95% and 99% confidence levels and in all interruptions, there is a spillover of upside and downside risk.   The exchange rate as a key variable, influences many of the government's policies and economic decisions. Any volatility in the exchange rate will have an adverse impact on both micro and macro levels. Given its impact on the imported input market, it is recommended that a coherent program of foreign exchange market management and stabilization to be developed by the central bank and the government. taking into account the high impression of the input market from volatility and exchange rate risk, it is suggested that, as far as the principle of comparative advantage allows, more strategic inputs such as corn and soybeans to be produced. Considering impressionability of Chicken markets from its inputs market in order to provide consumer welfare and prevent the imposition of additional costs, it is recommended a duplicate effort to be made to implement the policies of market regulation of inputs and reduce volatility in these markets.