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Breaks, trends and unit roots in commodity prices: a robust investigation

Breaks, trends and unit roots in commodity prices: a robust investigation Abstract This paper empirically examines the time series behavior of primary commodity prices relative to manufactures with reference to the nature of their underlying trends and the persistence of shocks driving the price processes. The direction and magnitude of the trends are assessed employing a set of econometric techniques that is robust to the nature of persistence in the commodity price shocks, thereby obviating the need for unit root pretesting. Specifically, the methods allow consistent estimation of the number and location of structural breaks in the trend function as well as facilitate the distinction between trend breaks and pure level shifts. Further, a new set of powerful unit root tests is applied to determine whether the underlying commodity price series can be characterized as difference or trend stationary processes. These tests treat breaks under the unit root null and the trend stationary alternative in a symmetric fashion thereby alleviating the procedures from spurious rejection problems and low power issues that plague most existing procedures. Relative to the extant literature, we find more evidence in favor of trend stationarity suggesting that real commodity price shocks are primarily of a transitory nature. We conclude with a discussion of the policy implications of our results. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Studies in Nonlinear Dynamics & Econometrics de Gruyter

Breaks, trends and unit roots in commodity prices: a robust investigation

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Publisher
de Gruyter
Copyright
Copyright © 2014 by the
ISSN
1081-1826
eISSN
1558-3708
DOI
10.1515/snde-2013-0022
Publisher site
See Article on Publisher Site

Abstract

Abstract This paper empirically examines the time series behavior of primary commodity prices relative to manufactures with reference to the nature of their underlying trends and the persistence of shocks driving the price processes. The direction and magnitude of the trends are assessed employing a set of econometric techniques that is robust to the nature of persistence in the commodity price shocks, thereby obviating the need for unit root pretesting. Specifically, the methods allow consistent estimation of the number and location of structural breaks in the trend function as well as facilitate the distinction between trend breaks and pure level shifts. Further, a new set of powerful unit root tests is applied to determine whether the underlying commodity price series can be characterized as difference or trend stationary processes. These tests treat breaks under the unit root null and the trend stationary alternative in a symmetric fashion thereby alleviating the procedures from spurious rejection problems and low power issues that plague most existing procedures. Relative to the extant literature, we find more evidence in favor of trend stationarity suggesting that real commodity price shocks are primarily of a transitory nature. We conclude with a discussion of the policy implications of our results.

Journal

Studies in Nonlinear Dynamics & Econometrics – de Gruyter

Published: Feb 1, 2014

References

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    Perron
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    Perron
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    Perron
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    Bloch
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    Kejriwal
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    Kaibni
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    Hotelling
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    Harvey
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    Kaibni
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    Cashin
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    Hadass
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    Campbell
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    Lee
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    Prebisch
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    Ocampo
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    Barnett
  • Additional Tests for a Unit Root Allowing the Possibility of Breaks in the Trend Function
    Vogelsang
  • On the Prevalence of Trends in Primary Commodity Prices of
    Kellard
  • a Estimating Deterministic Trends with an Integrated or Stationary Noise Component of
    Perron
  • Testing for a Unit Root in the Presence of a Possible Break in Trend
    Harris
  • Dealing with Structural Breaks Handbook of edited by Hampshire
    Perron
  • Partial Parameter Consistency in a Misspecified Structural Change Model
    Chong
  • The Limits to Growth New York Universe
    Meadows
  • of Trends in Primary Commodity Prices of
    Ghoshray
  • Lag Length Selection and the Construction of Unit Root Tests With Good Size
    Perron
  • Partial Parameter Consistency in a Misspecified Structural Change Model
    Chong
  • Pitfalls Opportunities What Macroeconomists Should Know About Unit Roots
    Campbell
  • Model of Commodity Prices after Sir of
    Deaton
  • Testing for Trends in the Terms of Trade between Primary Commodities and Manufactured Goods of
    Zanias
  • with Unlimited Supplies of Labor of and
    Lewis
  • Testing for Shifts in Trend with an Integrated or Stationary Noise Component of
    Perron
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    Heal
  • Simple Robust and Powerful Test of the Trend Hypothesis of
    Harvey
  • The Relationship between Price and Extraction cost for a Resource with a Backstop Technology The of
    Heal
  • Storage Commodity Markets University
    Williams
  • Trend Function Hypothesis Testing in the Presence of Serial Correlation
    Vogelsang
  • Terms of Trade Shocks in Are they Short - Lived Or Long - Lived of
    Cashin
  • Break Point Estimation and Spurious Rejections with Endogenous Unit Roots of and
    Lee
  • Unit Roots Level Shifts and Trend Breaks in Per Capita Output Robust Evaluation
    Kejriwal
  • On the Empirical Significance of the Hotelling Rule of Policy
    Livernois
  • The Great Crash the Oil Price Shock and the Unit Root Hypothesis Erratum
    Perron
  • Testing for Trends in the Terms of Trade between Primary Commodities and Manufactured Goods of
    Zanias
  • Estimating and Testing Linear Models with Multiple Structural Changes
    Perron
  • Estimating and Testing Linear Models with Multiple Structural Changes
    Perron
  • Steady - state Growth in a Hotelling Model of Resource Extraction of and
    Cynthia
  • On the of Commodity Prices of
    Deaton
  • Simple Robust and Powerful Tests of the Breaking Trend Hypothesis
    Harvey
  • How Persistent Are Shocks to World Commodity Prices
    Cashin
  • Multiple Trend Breaks and the Unit Root Hypothesis of and
    Lumsdaine
  • Trends and Random Walks in Macroeconomic Time Series : Further Evidence from a New Approach of Economic Dynamics and
    Perron
  • based Unit Root Tests with Multiple Structural Breaks both Under the Null and the Alternative Hypotheses
    Carrion
  • Short Note on Updating the Grilli and Commodity Price Index
    Pfaffenzeller
  • The Continuing Relevance of the Terms of Trade and Industrialization Debates Policies and Economic Development in the edited by Caldentey and
    Ocampo
  • Robust for Detecting Multiple Level Breaks in Autocorrelated Time Series of
    Harvey
  • How Persistent Are Shocks to World Commodity Prices
    Cashin
  • The Distribution of Gains between Investing and Borrowing Countries
    Singer
  • On the of Commodity Prices of
    Deaton
  • Simple Robust and Powerful Test of the Trend Hypothesis of
    Harvey
  • Minimum Unit Root Test with Two Structural Breaks of and
    Lee
  • Booms and Slumps in World Commodity Prices of
    Cashin
  • The Great Crash the Oil Price Shock and the Unit Root Hypothesis Erratum
    Perron
  • Robust for Detecting Multiple Level Breaks in Autocorrelated Time Series of
    Harvey
  • The of Resources of
    Hotelling
  • Minimum LM Unit Root Test with One Structural Break Appalachian State University Working Paper Available online athttp econ appstate edu RePEc pdf wp pdf
    Lee
  • Minimum Unit Root Test with Two Structural Breaks of and
    Lee
  • Commodity Agreements An Obituary Notice
    Gilbert
  • Handbook of Primary Commodities in the Global Economy University
    Radetski
  • How Much of Commodity Price Behavior can a Rational Expectations Storage Model Explain
    Peterson
  • On the Prevalence of Trends in Primary Commodity Prices of
    Kellard
  • Terms of Trade Shocks in Are they Short - Lived Or Long - Lived of
    Cashin
  • Trends in Natural Resource Commodity Prices : Deterministic or Stochastic of and
    Ahrens
  • Terms of Trade Shocks and Economic Performance Revisited and Cultural
    Hadass
  • Commodity Prices Cyclical Weakness or Secular Decline
    Reinhart
  • Commodity Prices in of
    Deaton
  • The of America and its Principal Problems New York United
    Prebisch
  • Testing for Shifts in Trend with an Integrated or Stationary Noise Component of
    Perron
  • Grade Selection under Uncertainty : Least Cost Last and other Anomalies of and
    Slade
  • Test of the Theory of Exhaustible Resources of
    Halvorsen
  • Spurious Rejections by Dickey Fuller Tests in the Presence of a Break Under the Null of
    Leybourne
  • Commodity Agreements An Obituary Notice
    Gilbert
  • Handbook of Primary Commodities in the Global Economy University
    Radetski
  • Non - renewable Resource Prices Deterministic or Stochastic Trends of and
    Lee
  • Simple Robust and Powerful Tests of the Breaking Trend Hypothesis
    Harvey
  • Non - renewable Resource Prices Deterministic or Stochastic Trends of and
    Lee
  • Efficient Tests for an Autoregressive Unit Root
    Elliott
  • Trends in Natural Resource Commodity Prices : An Analysis of the Time Domain of and
    Slade
  • Commodity Prices and Unit Root Tests
    Wang
  • Short Note on Updating the Grilli and Commodity Price Index
    Pfaffenzeller
  • The Distribution of Gains between Investing and Borrowing Countries
    Singer
  • The Great Crash the Oil Price Shock and the Unit Root Hypothesis
    Perron