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Oil price uncertainty and the Canadian economy: Evidence from a VARMA, GARCH-in-Mean, asymmetric BEKK model

  • Rahman, Sajjadur
  • Serletis, Apostolos

In this paper we build on recent work by Elder and Serletis (2010, forthcoming) and Rahman and Serletis (forthcoming) and investigate the relationship between oil price uncertainty and the level of economic activity, using quarterly Canadian data over the period from 1974:1 to 2010:1. In doing so, we use a bivariate VARMA, GARCH-in-Mean, asymmetric BEKK model, as detailed in Engle and Kroner (1995), Grier et al. (2004), and Shields et al. (2005). We show that the conditional variance–covariance process underlying output growth and the change in the real price of oil exhibits significant non-diagonality and asymmetry. We also present evidence that increased uncertainty about the change in the real price of oil is associated with a lower average growth rate of real economic activity in Canada, consistent with the results in Elder and Serletis (2010, forthcoming) and Rahman and Serletis (forthcoming) for the United States and Elder and Serletis (2009) for Canada. Our results are robust to alternative measures of the price of oil, alternative measures of the level of economic activity, and alternative data frequencies.

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File URL: http://www.sciencedirect.com/science/article/pii/S0140988311001964
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Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 34 (2012)
Issue (Month): 2 ()
Pages: 603-610

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Handle: RePEc:eee:eneeco:v:34:y:2012:i:2:p:603-610
DOI: 10.1016/j.eneco.2011.08.014
Contact details of provider: Web page: http://www.elsevier.com/locate/eneco

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  1. Elder, John, 2004. "Another Perspective on the Effects of Inflation Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 911-28, October.
  2. Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992. "Efficient Tests for an Autoregressive Unit Root," NBER Technical Working Papers 0130, National Bureau of Economic Research, Inc.
  3. Apostolos Serletis, 2012. "Oil Price Uncertainty," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 8407, November.
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  8. Elder, John & Serletis, Apostolos, 2009. "Oil price uncertainty in Canada," Energy Economics, Elsevier, vol. 31(6), pages 852-856, November.
  9. Kalvinder Shields & Nilss Olekalns & Ólan T. Henry & Chris Brooks, 2003. "Measuring the Response of Macroeconomic Uncertainty to Shocks," Department of Economics - Working Papers Series 870, The University of Melbourne.
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  12. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
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  14. Edelstein, Paul & Kilian, Lutz, 2007. "The Response of Business Fixed Investment to Changes in Energy Prices: A Test of Some Hypotheses About the Transmission of Energy Price Shocks," CEPR Discussion Papers 6507, C.E.P.R. Discussion Papers.
  15. Peter Ferderer, J., 1996. "Oil price volatility and the macroeconomy," Journal of Macroeconomics, Elsevier, vol. 18(1), pages 1-26.
  16. Ben S. Bernanke, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 98(1), pages 85-106.
  17. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  18. Kroner, Kenneth F & Ng, Victor K, 1998. "Modeling Asymmetric Comovements of Asset Returns," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 817-44.
  19. Kevin B. Grier & Ólan T. Henry & Nilss Olekalns & Kalvinder Shields, 2004. "The asymmetric effects of uncertainty on inflation and output growth," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(5), pages 551-565.
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