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

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  • Ghoshray Atanu

    () (Department of Economics, University of Bath, Bath, BA2 7AY, UK)

  • Kejriwal Mohitosh

    (Krannert School of Management, Purdue University, West Lafayette, Indiana, USA)

  • Wohar Mark

    (Department of Economics, University of Nebraska-Omaha, Omaha, Nebraska, USA)

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.

Suggested Citation

  • Ghoshray Atanu & Kejriwal Mohitosh & Wohar Mark, 2014. "Breaks, trends and unit roots in commodity prices: a robust investigation," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 18(1), pages 23-40, February.
  • Handle: RePEc:bpj:sndecm:v:18:y:2014:i:1:p:23-40:n:5
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    References listed on IDEAS

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    Cited by:

    1. Juncal Cunado & Luis A. Gil-Alana & Rangan Gupta, 2018. "Persistence in Trends and Cycles of Gold and Silver Prices: Evidence from Historical Data," Working Papers 201816, University of Pretoria, Department of Economics.
    2. repec:kap:iecepo:v:14:y:2017:i:4:d:10.1007_s10368-016-0355-1 is not listed on IDEAS
    3. Winkelried, Diego, 2018. "Unit roots, flexible trends, and the Prebisch-Singer hypothesis," Journal of Development Economics, Elsevier, vol. 132(C), pages 1-17.
    4. Byrne, Joseph P & Sakemoto, Ryuta & Xu, Bing, 2017. "Commodity Price Co-movement: Heterogeneity and the Time Varying Impact of Fundamentals," MPRA Paper 80791, University Library of Munich, Germany.
    5. Ghoshray, Atanu, 2015. "A robust estimation of the terms of trade between the United Kingdom and British India, 1858–1947," Economic Modelling, Elsevier, vol. 51(C), pages 53-57.
    6. Atanu Ghoshray & Faiza Khan, 2015. "New empirical evidence on income convergence," Empirical Economics, Springer, vol. 49(1), pages 343-361, August.
    7. Sun, Jingwei & Shi, Wendong, 2015. "Breaks, trends, and unit roots in spot prices for crude oil and petroleum products," Energy Economics, Elsevier, vol. 50(C), pages 169-177.
    8. Atanu Ghoshray, 2013. "Dynamic Persistence of Primary Commodity Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 95(1), pages 153-164.

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