VOLATILITY SPILLOVER IN AQUACULTURE AND FISHERIES MARKETS

Several papers study market integration between farmed and wild fish prices, and many find that the output from two production technologies are substitutes. Consequently, a competitive aquaculture industry will increase the total supply at reduced prices. To further study this market relationship, this paper considers volatility spillover between aquaculture and wild fisheries markets. Previous studies show that aquaculture has a relatively low price volatility compared to wild fisheries, partially due to better opportunity to smooth supply by adjusting production and timing. With varying seasonal output from wild fisheries, quantity, quality and timing cannot be controlled in the same manner.

The paper considers a set of fish prices from 01.1990 to 11.2015 using monthly trade data for EU, Japan and US markets. We consider volatility spillover for a set of species where products from both technologies occur per region. In particular, we consider salmon for all three regions, trout in EU and US, seabream in EU and smelt in the US market. For invertebrates, we consider prawns in EU and crab for Japan and US. Finally, for molluscs, we have data for clams, mussels and oysters in the US market. Volatility spillover is calculated using Diebold and Yilmaz (2012), allowing us to estimate both directional and total volatility spillover between markets, and measure market integration with regards to price volatility over time.

The results suggest that there is considerable market interaction in price volatility between farmed and wild fish prices. Moreover, spillover originates from the wild fish prices to farmed fish prices, which may be a result of uncertainty from landings and seasonal output in fisheries. To accommodate a constant demand for seafood, the aquaculture industry can profit from adjusting according to expected supply from the fisheries. Consequently, it is intuitive that the uncertainty originates from wild seafood supply.

For a commodity like salmon, aquaculture has steadily increased its supply share from about 50% in the 90s to 80% in 2015 for Europe and US. For Japan, it has also increased, from only 13% in 1990 to 56% in 2015. The European (Figure 1) and US market has common characteristics: volatility spillover occurs from captured to farmed fish prices, although at a lower rate as the aquaculture supply increases. The Japanese market does not experience the same, as spillover in volatility since 2002 has occurred from farmed fish prices.

Reference: Diebold, F. X., & Yilmaz, K. (2012). Better to give than to receive: Predictive directional measurement of volatility spillovers. International Journal of Forecasting, 28(1), 57-66.