Examining volatility dynamics, spillovers and government water recovery in Murray-Darling Basin water markets

Abstract

Although participation in water markets is widespread among irrigators in the Murray-Darling Basin of Australia, there has been a lack of study on the dynamics of water markets,in particular price and volume dynamics, volatility and spillovers. Questions have also beenraised regarding the impact on markets from governments buying back permanent waterfrom consumptive use to return to environmental use. VARX-BEKK-GARCH time-seriesregression was used to model the water market dynamics of monthly permanent and tem-porary water market trade from 1997 to 2017 in one of the largest water markets in theMurray-Darling Basin, the Goulburn-Murray Irrigation District. Results suggest that thetemporary market was more volatile than the permanent market, while persistency involatility only exists in permanent markets. Unidirectional transmission spillovers existsin both markets from prices to volumes. The main drivers of temporary water prices werewater scarcity related, while permanent prices were most significantly influenced by pre-vious permanent water prices and current temporary water market prices. A statisticallysignificant negative impact on temporary volume-traded from government water recovery(e.g. a 1% increase in water recovery resulted in a 0.14% reduction in water volume-traded)was found, but no significant impact from government recovery was found on temporarywater prices, nor on permanent market prices and volumes. However, government waterrecovery increased the volatility of temporary market prices and volumes, signaling poten-tial increased issues of risk and uncertainty for irrigators engaging in temporary watermarkets.