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Supply and demand driven oil price changes and their non-linear impact on precious metal returns: A Markov regime switching approach

Author

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  • Uddin, Gazi Salah
  • Rahman, Md Lutfur
  • Shahzad, Syed Jawad Hussain
  • Rehman, Mobeen Ur

Abstract

This paper examines the nonlinear effect of oil price shocks on precious metal returns using Markov regime switching regression. We use Ready's (2018) approach to decompose oil price changes into supply, demand, and risk driven shocks. Results indicate a significant positive impact of demand and supply shocks and a negative impact of risk shocks on precious metal returns. Although we find evidence of switching between low and high volatility regimes, we do not find strong regime effect on supply or demand shocks' contemporaneous relationship with precious metal returns. However, risk shocks' influence on precious metal returns is strongly regime dependent. These results generally hold for different distributional specification of error terms.

Suggested Citation

  • Uddin, Gazi Salah & Rahman, Md Lutfur & Shahzad, Syed Jawad Hussain & Rehman, Mobeen Ur, 2018. "Supply and demand driven oil price changes and their non-linear impact on precious metal returns: A Markov regime switching approach," Energy Economics, Elsevier, vol. 73(C), pages 108-121.
  • Handle: RePEc:eee:eneeco:v:73:y:2018:i:c:p:108-121
    DOI: 10.1016/j.eneco.2018.05.024
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    Keywords

    Oil; Precious metal; Demand and supply shocks; VAR; Markov regime switching regression;
    All these keywords.

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • L61 - Industrial Organization - - Industry Studies: Manufacturing - - - Metals and Metal Products; Cement; Glass; Ceramics
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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