A New Look at Copper Markets: A Regime-Switching Jump Model
GARCH-jump models of metal price returns, while allowing for sudden movements (jumps), apply the same specification of the jump component in both 'bear'and 'bull' markets. As a result, the more frequent but relatively small jumps that occur in both bear and bull markets dominate the characterization of the jump process. Given that large jumps, although less frequent, are still quite common in copper (and other metal) markets, this is a potential shortcoming of current models. More flexibility can be added to the modeling process by allowing for regime-switching. In this paper we specify a model that allows for switching across two separate regimes, with the possibility of different jump sizes and frequencies under each regime, along with a regime-specific GARCH process for the conditional variance. This model is applied to daily copper futures prices over the period of January 2 1980 through the end of July 2007. The model is estimated both with and without factors such as interest and exchange rate movements entering into the specification of the state-dependent mean of the conditional jump size. In some respects, a Regime Switching GARCH-Jump Model performs well when applied to the copper returns data. The results are mixed in terms of whether or not variations of the model that allow jump sizes to be a function of interest or exchange rates offer much of an advantage over a pure time series approach to the modeling of copper returns over the past three decades.
|Date of creation:||17 Mar 2009|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (780) 492-3406
Fax: (780) 492-3300
Web page: http://www.economics.ualberta.ca/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John M. Maheu & Thomas H. McCurdy, 2002.
"Nonlinear Features of Realized FX Volatility,"
The Review of Economics and Statistics,
MIT Press, vol. 84(4), pages 668-681, November.
- Deaton, A. & Laroque, G., 1989.
"On The Behavior Of Commodity Prices,"
145, Princeton, Woodrow Wilson School - Development Studies.
- Chew Lian Chua & Sandy Suardi, 2007. "Markov-Switching Mean Reversion in Short-Term Interest Rates: Evidence from East Asian Economies," The Economic Record, The Economic Society of Australia, vol. 83(263), pages 383-397, December.
- Bollerslev, Tim, 1986.
"Generalized autoregressive conditional heteroskedasticity,"
Journal of Econometrics,
Elsevier, vol. 31(3), pages 307-327, April.
- Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
- Chan, Wing H & Maheu, John M, 2002. "Conditional Jump Dynamics in Stock Market Returns," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 377-89, July.
- Heal, Geoffrey & Barrow, Michael, 1980. "The Relationship between Interest Rates and Metal Price Movements," Review of Economic Studies, Wiley Blackwell, vol. 47(1), pages 161-81, January.
- Wing H. Chan & Denise Young, 2006. "Jumping hedges: An examination of movements in copper spot and futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 26(2), pages 169-188, 02.
- Maheu, John M & McCurdy, Thomas H, 2000. "Identifying Bull and Bear Markets in Stock Returns," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(1), pages 100-112, January.
- Hamilton, James D. & Susmel, Raul, 1994.
"Autoregressive conditional heteroskedasticity and changes in regime,"
Journal of Econometrics,
Elsevier, vol. 64(1-2), pages 307-333.
- Tom Doan, . "RATS programs to estimate Hamilton-Susmel Markov Switching ARCH model," Statistical Software Components RTZ00083, Boston College Department of Economics.
- Slade, Margaret E., 1982. "Trends in natural-resource commodity prices: An analysis of the time domain," Journal of Environmental Economics and Management, Elsevier, vol. 9(2), pages 122-137, June.
When requesting a correction, please mention this item's handle: RePEc:ris:albaec:2009_013. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Brenda Carrier)
If references are entirely missing, you can add them using this form.