Price And Volume Relationships Across Water
Trading Zones
Author(s)
R. Brooks & E. Harris
Abstract
In the Australian context greater policy reliance has been placed on the role that
market based solutions can play in solving problems in the allocation of
irrigation water. In Northern Victoria one of the most active areas of water
trading is in the Goulburn-Murray Irrigation District. To facilitate water trading
in this area an electronic market clearing mechanism exists through the
Watermove arrangements. Under the Watermove arrangements the state is
divided into regions and trading zones, however most of the trading zones have
very little trading activity. This paper explores relationships in price and volumes
across the two most active trading zones in the Goulburn-Murray Irrigation
District in Northern Victoria. While previous papers have explored spatial
dimensions of pricing across trading zones our focus is on relationships driven
by price and volume characteristics. An analysis of price and volume
relationships across trading zones enables an understanding of whether trading
volume in a zone produces more informed prices and enables that zone to take on
a price leadership role. Our analysis considers the stationarity properties of the
price and volume data across the two trading zones and then estimates VAR
models of the price and volume relationships across these trading zones. From
the VAR models we are able to conduct both Granger causality tests and
variance decomposition analysis. This analysis shows that the most actively
traded of the two trading zones (the Greater Goulburn trading zone) plays the
key role in price leadership. This finding is broadly consistent with previous
research on highly liquid financial markets and suggests that irrigation water
markets are developing characteristics similar to more liquid financial markets,
giving confidence in their successful operations.
Keywords: water markets, price leadership, Australia, Murray-Darling basin.
Keywords
water markets, price leadership, Australia, Murray-Darling basin.
Related Book
Other papers in this volume
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