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Commodity Prices And Unit Root Tests

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  • Wang, Dabin
  • Tomek, William G.
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    Abstract

    Endogenous variables in structural models of agricultural commodity markets are typically treated as stationary. Yet, tests for unit roots have rather frequently implied that commodity prices are not stationary. This seeming inconsistency is investigated by focusing on alternative specifications of unit root tests. We apply various specifications to Illinois farm prices of corn, soybeans, barrows and gilts, and milk for the 1960 through 2002 time span. The preponderance of the evidence suggests that nominal prices do not have unit roots, but under certain specifications, the null hypothesis of a unit root cannot be rejected, particularly when the logarithms of prices are used. If the test specification does not account for a structural change that shifts the mean of the variable, the results are biased toward concluding that a unit root exists. In general, the evidence does not favor the existence of unit roots.

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    Bibliographic Info

    Paper provided by Cornell University, Department of Applied Economics and Management in its series Working Papers with number 127145.

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    Date of creation: May 2004
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    Handle: RePEc:ags:cudawp:127145

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    Keywords: commodity price; unit root tests.; Crop Production/Industries;

    References

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    1. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    2. Perron, Pierre & Vogelsang, Timothy J, 1992. "Nonstationarity and Level Shifts with an Application to Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 301-20, July.
    3. Perron, Pierre, 1991. "Test Consistency with Varying Sampling Frequency," Econometric Theory, Cambridge University Press, vol. 7(03), pages 341-368, September.
    4. Richard Smith & Robert Taylor, . "Additional Critical Values and Asymptotic Representations for Seasonal Unit Root Tests," Discussion Papers 95/43, Department of Economics, University of York.
    5. Rodrigues, Paulo M. M. & Taylor, A. M. Robert, 2004. "Alternative estimators and unit root tests for seasonal autoregressive processes," Journal of Econometrics, Elsevier, vol. 120(1), pages 35-73, May.
    6. Busetti, Fabio & Taylor, A. M. Robert, 2003. "Testing against stochastic trend and seasonality in the presence of unattended breaks and unit roots," Journal of Econometrics, Elsevier, vol. 117(1), pages 21-53, November.
    7. Marcus J. Chambers, 2001. "Testing for Unit Roots with Flow Data and Varying Sampling Frequency," Economics Discussion Papers 529, University of Essex, Department of Economics.
    8. Cuddington, John T & Urzua, Carlos M, 1989. "Trends and Cycles in the Net Barter Terms of Trade: A New Approach," Economic Journal, Royal Economic Society, vol. 99(396), pages 426-42, June.
    9. Marriott, John & Newbold, Paul, 2000. "The strength of evidence for unit autoregressive roots and structural breaks: A Bayesian perspective," Journal of Econometrics, Elsevier, vol. 98(1), pages 1-25, September.
    10. Perron, Pierre & Vogelsang, Timothy J, 1992. "Testing for a Unit Root in a Time Series with a Changing Mean: Corrections and Extensions," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(4), pages 467-70, October.
    11. Vogelsang, Timothy J., 1997. "Wald-Type Tests for Detecting Breaks in the Trend Function of a Dynamic Time Series," Econometric Theory, Cambridge University Press, vol. 13(06), pages 818-848, December.
    12. Paul Newbold & Tony Rayner & Neil Kellard, 2000. "Long-Run Drift, Co-Movement and Persistence in Real Wheat and Maize Prices," Journal of Agricultural Economics, Wiley Blackwell, vol. 51(1), pages 106-121.
    13. Leybourne, Stephen J. & C. Mills, Terence & Newbold, Paul, 1998. "Spurious rejections by Dickey-Fuller tests in the presence of a break under the null," Journal of Econometrics, Elsevier, vol. 87(1), pages 191-203, August.
    14. Choi, In, 1992. "Effects of data aggregation on the power of tests for a unit root : A simulation study," Economics Letters, Elsevier, vol. 40(4), pages 397-401, December.
    15. Kim, Tae-Hwan & Leybourne, Stephen & Newbold, Paul, 2002. "Unit root tests with a break in innovation variance," Journal of Econometrics, Elsevier, vol. 109(2), pages 365-387, August.
    16. Bai, Jushan, 1998. "A Note On Spurious Break," Econometric Theory, Cambridge University Press, vol. 14(05), pages 663-669, October.
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    Cited by:
    1. Guillotreau, Patrice & Jiménez-Toribio, Ramón, 2011. "The price effect of expanding fish auction markets," Journal of Economic Behavior & Organization, Elsevier, vol. 79(3), pages 211-225, August.

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