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Soybean Excessive Food Price Variability Early Warning System

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General Documentation

The tools presented in this section provide a visual representation of historical periods of excessive global price volatility from 2000-present, as well as a daily volatility status. This status can alert policymakers when world markets are experiencing a period of excessive food price volatility; this information can then be used to determine appropriate country-level food security responses, such as the release of physical food stocks.

A time period of excessive price volatility: A period of time characterized by extreme price variation (volatility) is a period of time in which we observe alarge number of extreme positive returns. An extreme positive return is defined to be a return that exceeds a certain preestablished threshold. This threshold is normally taken to be a high order (95 or 99%) conditional quantile, (i.e. a value of return that is exceeded with low probability: 5 or 1%). In this model, we are using the 95% quantile.

Our lighting system:

The probability that we will observe k days of extreme price returns (returns above the 95% quantile as explained in the definition of excessive price volatility) in a period of D consecutive days is defined as:


To define our lighting system, we implement a two-sided test based on a normal approximation for the binomial distribution. Using a period of 60 consecutive days that precede any date (i.e. D=60), we compare the probability value obtained from our stochastic model of returns with the chosen 5% probability of observing extreme return.

The decision rule imbedded in the color system is as follows:

  • RED or Excessive Volatility: If the probability value is less than or equal to 2.5%, the null that violations (i.e. days of extreme price returns) are consistent with expected violations is highly questionable, meaning that we are in a period of an excessive number of days of extreme price returns relative to that expected by the model ; therefore we characterize that date as belonging to a period of excessive volatility.
  • ORANGE or Moderate volatility: If the probability value is bigger than 2.5% or less than or equal to 5%, the null that violations are consistent with expectations is questionable at a low level, meaning that we are in a period of moderate number of days of extreme price returns relative to that expected; therefore we characterize that date as belonging to a period of moderate volatility.
  • GREEN or Low volatility: If the probability value is bigger than 5%, we accept the null that violations are consistent with expectations, meaning that the number of extreme price returns is consistent to what is expected from the model; therefore we characterize that date as belonging to is a period of low volatility.

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    Technical Documentation

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    Watch Maximo Torero, Director of IFPRI's Markets, Trade, and Institutions Division, and IFPRI Researcher Carlos Martins-Filho describe the model behind the IFPRI's "Excessive Food Price Variation Early Warning System".


    Watch Senior IFPRI Researcher and University of Colorado Professor Carlos Martins-Filho discuss the research behind these powerful tools.