Modelling and forecasting metal prices: evidence from developing African economies

Abstract

Developing Africa has been heavily dependent on primary commodities for decades as these countries are rich in mineral resources and often tend to export that and little else. However, commodities are highly susceptible to volatility and their effects on these economies are enormous. This paper investigates the extent to which the GARCH and EGARCH models can accurately be employed to model and forecast metal prices. Also, a p-dimensional VECM is formulated in establishing the extent to which the metals are co-integrated. Seven metals - Aluminium, Copper, Gold, Lead, Nickel, Platinum and Zinc have been employed for the purpose of this study. The models yielded satisfactory prediction results, albeit mixed findings in terms of the superiority of the models. Nonetheless, we conclude that the results are sufficient in aiding African economies in deriving appropriate policies and trading strategies so as to capitalise on export revenues, resulting in increased GDP and overall economic growth and development of their countries.

Key Words: volatility, GARCH, EGARCH, VECM forecast, metal prices