Jump to ContentJump to Main Navigation
Show Summary Details
More options …

Studies in Nonlinear Dynamics & Econometrics

Ed. by Mizrach, Bruce

5 Issues per year

IMPACT FACTOR 2017: 0.855

CiteScore 2017: 0.76

SCImago Journal Rank (SJR) 2017: 0.668
Source Normalized Impact per Paper (SNIP) 2017: 0.894

Mathematical Citation Quotient (MCQ) 2016: 0.03

See all formats and pricing
More options …
Volume 18, Issue 1


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

Atanu Ghoshray / Mohitosh Kejriwal / Mark Wohar
Published Online: 2013-08-13 | DOI: https://doi.org/10.1515/snde-2013-0022


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.

This article offers supplementary material which is provided at the end of the article.

Keywords: level shifts; primary commodity prices; structural breaks; trend functions; unit roots


  • Ahrens, W. A., and V. R. Sharma. 1997. “Trends in Natural Resource Commodity Prices: Deterministic or Stochastic?” Journal of Environmental Economics and Management 33: 59–74.CrossrefGoogle Scholar

  • Bai, J., and P. Perron. 1998. “Estimating and Testing Linear Models with Multiple Structural Changes.” Econometrica 66: 47–78.CrossrefGoogle Scholar

  • Barnett, H. J., and C. Morse. 1963. Scarcity and Growth: The Economics of Natural Resource Availability. Baltimore, USA: Johns Hopkins University Press.Google Scholar

  • Berck, P., and M. Roberts. 1996. “Natural Resource Prices: Will they Ever Turn Up?” Journal of Environmental Economics and Management 31: 65–78.CrossrefGoogle Scholar

  • Bloch, H., and D. Sapsford. 2000. “Whither the terms of trade? An Elaboration of the Prebisch Singer Hypothesis.” Cambridge Journal of Economics 24: 461–481.CrossrefGoogle Scholar

  • Campbell, J. Y., and P. Perron. 1991. “Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots.” NBER Macroeconomics Annual 6: 141–201.CrossrefGoogle Scholar

  • Carrion-i-Silvestre, J. L., D. Kim, and P. Perron. 2009. “GLS-based Unit Root Tests with Multiple Structural Breaks both Under the Null and the Alternative Hypotheses.” Econometric Theory 25: 1754–1792.CrossrefGoogle Scholar

  • Cashin, P., H. Liang, and C. J. McDermott. 2000. “How Persistent Are Shocks to World Commodity Prices?” IMF Staff Papers 47: 177–217.Google Scholar

  • Cashin, P., C. J. McDermott, and A. Scott. 2002. “Booms and Slumps in World Commodity Prices.” Journal of Development Economics 69: 277–296.CrossrefGoogle Scholar

  • Cashin, P., C. J. McDermott, and C. Pattillo. 2004. “Terms of Trade Shocks in Africa: Are they Short-Lived Or Long-Lived?” Journal of Development Economics 73: 727–744.CrossrefGoogle Scholar

  • Chong, T. T. 1995. “Partial Parameter Consistency in a Misspecified Structural Change Model.” Economics Letters 49: 351–357.CrossrefGoogle Scholar

  • Cynthia-Lin, C., and G. Wagner. 2007. “Steady-state Growth in a Hotelling Model of Resource Extraction.” Journal of Environmental Economics and Management 54: 68–83.CrossrefGoogle Scholar

  • Deaton, A. 1999. “Commodity Prices and Growth in Africa.” Journal of Economic Perspectives 13: 23–40.CrossrefGoogle Scholar

  • Deaton, A., and G. Laroque. 1992. “On the Behaviour of Commodity Prices.” Review of Economic Studies 59: 1–23.CrossrefGoogle Scholar

  • Deaton, A., and G. Laroque. 2003. “A Model of Commodity Prices after Sir Arthur Lewis.” Journal of Development Economics 71: 289–310.CrossrefGoogle Scholar

  • Elliott, G., T. Rothenberg, and J. H. Stock. 1996. “Efficient Tests for an Autoregressive Unit Root.” Econometrica 64: 813–836.CrossrefGoogle Scholar

  • Ghoshray, A. 2011. “A Reexamination of Trends in Primary Commodity Prices.” Journal of Development Economics 95: 242–251.CrossrefGoogle Scholar

  • Gilbert, C. L. 1996. “International Commodity Agreements: An Obituary Notice.” World Development 24: 1–19.CrossrefGoogle Scholar

  • Hadass, Y. S., and J. G. Williamson. 2003. “Terms of Trade Shocks and Economic Performance, 1870–1940: Prebisch and Singer Revisited.” Economic Development and Cultural Change 51: 629–656.CrossrefGoogle Scholar

  • Halvorsen, R., and T. R. Smith. 1991. “A Test of the Theory of Exhaustible Resources.” Quarterly Journal of Economics 106: 123–140.Google Scholar

  • Harris, D., D. I. Harvey, S. J. Leybourne, and A. M. R. Taylor. 2009. “Testing for a Unit Root in the Presence of a Possible Break in Trend.” Econometric Theory 25: 1545–1588.CrossrefGoogle Scholar

  • Harvey, D. I., S. J. Leybourne, and A. M. R. Taylor. 2007. “A Simple, Robust, and Powerful Test of the Trend Hypothesis.” Journal of Econometrics 141: 1302–1330.CrossrefGoogle Scholar

  • Harvey, D. I., S. J. Leybourne, and A. M. R. Taylor. 2009. “Simple, Robust, and Powerful Tests of the Breaking Trend Hypothesis.” Econometric Theory 25: 995–1029.CrossrefGoogle Scholar

  • Harvey, D. I., S. J. Leybourne, and A. M. R. Taylor. 2010. “Robust Methods for Detecting Multiple Level Breaks in Autocorrelated Time Series.” Journal of Econometrics 157: 342–358.Google Scholar

  • Harvey, D. I., N. M. Kellard, J. B. Madsen, and M. E. Wohar. 2010. “The Prebisch Singer Hypothesis: Four Centuries of Evidence.” Review of Economics and Statistics 92: 367–377.CrossrefGoogle Scholar

  • Hatanaka, M., and K. Yamada. 1999. “A Unit Root Test in the Presence of Structural Changes in I(1) and I(0) models.” In Cointegration, Causality and Forecasting, edited by R. F. Engle, and H. White, Oxford, UK: Oxford University Press.Google Scholar

  • Heal, G. 1976. “The Relationship between Price and Extraction cost for a Resource with a Backstop Technology.” The Bell Journal of Economics 7: 371–378.CrossrefGoogle Scholar

  • Hotelling, H. 1931. “The Economics of Exhaustible Resources.” Journal of Political Economy 39: 137–175.CrossrefGoogle Scholar

  • Kaibni, N. 1986. “Evolution of the Compensatory Financing Facility.” Finance and Development 23: 24–27.Google Scholar

  • Kejriwal, M., and C. Lopez. 2012. “Unit Roots, Level Shifts and Trend Breaks in Per Capita Output: A Robust Evaluation.” Econometric Reviews 32: 892–927.Google Scholar

  • Kejriwal, M., and P. Perron. 2010. “A Sequential Procedure to Determine the Number of Breaks in Trend with an Integrated or Stationary Noise Component.” Journal of Time Series Analysis 31: 305–328.CrossrefGoogle Scholar

  • Kellard, N., and M. Wohar. 2006. “On the Prevalence of Trends in Primary Commodity Prices.” Journal of Development Economics 79: 146–167.CrossrefGoogle Scholar

  • Krautkraemer, J. 1998. “Nonrenewable Resource Scarcity.” Journal of Economic Literature 36: 2065–2107.Google Scholar

  • Lee, J., and M. Strazicich. 2001. “Break Point Estimation and Spurious Rejections with Endogenous Unit Roots.” Oxford Bulletin of Economics and Statistics 63: 535–558.CrossrefGoogle Scholar

  • Lee, J., and M. Strazicich. 2003. “Minimum LM Unit Root Test with Two Structural Breaks.” Review of Economics and Statistics 85: 1082–1089.CrossrefGoogle Scholar

  • Lee, J., and M. Strazicich. 2004. “Minimum LM Unit Root Test with One Structural Break.” Appalachian State University Working Paper, Available online at http://econ.appstate.edu/RePEc/pdf/wp0417.pdf.

  • Lee, J., J. List, and M. Strazicich. 2006. “Non-renewable Resource Prices: Deterministic or Stochastic Trends?” Journal of Environmental Economics and Management 51: 354–370.CrossrefGoogle Scholar

  • Lewis, A., 1954. “Economic Development with Unlimited Supplies of Labor.” Manchester School of Economic and Social Studies 22: 139–191.CrossrefGoogle Scholar

  • Leon, J., and R. Soto. 1997. “Structural Breaks and Long Run Trends in Commodity Prices.” Journal of International Development 9: 347–366.CrossrefGoogle Scholar

  • Leybourne, S. J., T. C. Mills, and P. Newbold. 1998. “Spurious Rejections by Dickey-Fuller Tests in the Presence of a Break Under the Null.” Journal of Econometrics 87: 191–203.CrossrefGoogle Scholar

  • Livernois, J. 2009. “On the Empirical Significance of the Hotelling Rule.” Review of Environmental Economics and Policy 3: 22–41.Google Scholar

  • Lumsdaine, R., and D. Papell. 1997. “Multiple Trend Breaks and the Unit Root Hypothesis.” Review of Economics and Statistics 79: 212–218.CrossrefGoogle Scholar

  • Meadows, D. H., D. L. Meadows, J. Randers, and W. Behrens. 1972. The Limits to Growth. New York: Universe Books.Google Scholar

  • Ng, S., and P. Perron. 2001. “Lag Length Selection and the Construction of Unit Root Tests With Good Size and Power.” Econometrica 69: 1519–1554.CrossrefGoogle Scholar

  • Ocampo, J. A., and M. A. Parra. 2007. “The Continuing Relevance of the Terms of Trade and Industrialization Debates.” In Ideas, Policies and Economic Development in the Americas, edited by E. Perez-Caldentey and M. Vernengo, Oxford, UK: Routledge.Google Scholar

  • Perron, P. 1988. “Trends and Random Walks in Macroeconomic Time Series: Further Evidence from a New Approach.” Journal of Economic Dynamics and Control 12: 297–332.CrossrefGoogle Scholar

  • Perron, P. 1989. “The Great Crash, the Oil Price Shock and the Unit Root Hypothesis.” Econometrica 57: 1361–1401.CrossrefGoogle Scholar

  • Perron, P. 2006. “Dealing with Structural Breaks.” In Palgrave Handbook of Econometrics, edited by K. Patterson and T.C. Mills, 278–352. Basingstoke, Hampshire, UK: Palgrave Macmillan.Google Scholar

  • Perron, P., and T. J. Vogelsang. 1993. “The Great Crash, the Oil Price Shock and the Unit Root Hypothesis: Erratum.” Econometrica 61: 248–249.Google Scholar

  • Perron, P., and T. Yabu. 2009a. “Estimating Deterministic Trends with an Integrated or Stationary Noise Component.” Journal of Econometrics 151: 56–69.Google Scholar

  • Perron, P., and T. Yabu. 2009b. “Testing for Shifts in Trend with an Integrated or Stationary Noise Component.” Journal of Business and Economic Statistics 27: 369–396.CrossrefGoogle Scholar

  • Perron, P., and X. Zhu. 2005. “Structural Breaks with Deterministic and Stochastic Trends.” Journal of Econometrics 129: 65–119.Google Scholar

  • Peterson, H. H., and W. G. Tomek. 2005. “How Much of Commodity Price Behavior can a Rational Expectations Storage Model Explain?” Agricultural Economics 33: 289–303.CrossrefGoogle Scholar

  • Pfaffenzeller, S., P. Newbold, and A. Rayner. 2007. “A Short Note on Updating the Grilli and Yang Commodity Price Index.” World Bank Economic Review 21: 151–163.CrossrefGoogle Scholar

  • Prebisch, R. 1950. The Economic Development of Latin America and its Principal Problems. New York: United Nations.Google Scholar

  • Radetski, M. 2008. A Handbook of Primary Commodities in the Global Economy. Cambridge, UK: Cambridge University Press.Google Scholar

  • Reinhart, C. M., and P. Wickham. 1994. “Commodity Prices: Cyclical Weakness or Secular Decline?” IMF Staff Papers 41: 175–213.CrossrefGoogle Scholar

  • Singer, H. 1950. “The Distribution of Gains between Investing and Borrowing Countries.” American Economic Review, Papers and Proceedings 11: 473–485.Google Scholar

  • Slade, M. E. 1982. “Trends in Natural Resource Commodity Prices: An Analysis of the Time Domain.” Journal of Environmental Economics and Management 9: 122–137.CrossrefGoogle Scholar

  • Slade, M. E. 1988. “Grade Selection under Uncertainty: Least Cost Last and other Anomalies.” Journal of Environmental Economics and Management 15: 189–205.CrossrefGoogle Scholar

  • Vogelsang, T. J. 1998. “Trend Function Hypothesis Testing in the Presence of Serial Correlation.” Econometrica 66: 123–148.CrossrefGoogle Scholar

  • Vogelsang, T. J., and P. Perron. 1998. “Additional Tests for a Unit Root Allowing the Possibility of Breaks in the Trend Function.” International Economic Review 39: 1073–1100.CrossrefGoogle Scholar

  • Wang, D., and W. G. Tomek. 2007. “Commodity Prices and Unit Root Tests.” American Journal of Agricultural Economics 89: 873–689.CrossrefGoogle Scholar

  • Williams, J., and B. Wright. 1991. “Storage and Commodity Markets.” UK: Cambridge University Press.Google Scholar

  • Zanias, G. 2005. “Testing for Trends in the Terms of Trade between Primary Commodities and Manufactured Goods.” Journal of Development Economics 78: 49–59.CrossrefGoogle Scholar

  • Zivot, E., and D. Andrews. 1992. “Further Evidence on the Great Crash, the Oil Price Shock and the Unit Root Hypothesis.” Journal of Business and Economic Statistics 10: 251–270.Google Scholar

About the article

Corresponding author: Atanu Ghoshray, Department of Economics, University of Bath, Bath, BA2 7AY, UK, e-mail:

Published Online: 2013-08-13

Published in Print: 2014-02-01

Strictly speaking, the null hypothesis must be re-stated as H0: μi=βi=0 to obtain pivotal limiting distributions for the test statistics (see Section 4.2 in HLTb).

A potential strategy in this case to dissociate a level from a slope shift could be to use a t-statistic to test for the significance of the level shift parameter. Such a strategy is, however, flawed since, as shown in Perron and Zhu (2005), the level shift parameter is not identified in this case.

If a unit root is indeed present, the estimates of the break dates (obtained from the first-differenced specification) from an underspecified model are consistent for those break dates inserting which allow the greatest reduction in the sum of squared residuals and therefore correspond to the most dominant breaks in this sense (see Chong 1995; Bai and Perron 1998).

The level breaks are modeled as local to zero in the I(0) case and as increasing functions of sample size in the I(1) case.

Note that Perron (1989) devised unit root testing procedures that are invariant to the magnitude of the shift in level and/or slope but his analysis was restricted to the known break date case.

Citation Information: Studies in Nonlinear Dynamics and Econometrics, Volume 18, Issue 1, Pages 23–40, ISSN (Online) 1558-3708, ISSN (Print) 1081-1826, DOI: https://doi.org/10.1515/snde-2013-0022.

Export Citation

©2014 by Walter de Gruyter Berlin Boston.Get Permission

Supplementary Article Materials

Citing Articles

Here you can find all Crossref-listed publications in which this article is cited. If you would like to receive automatic email messages as soon as this article is cited in other publications, simply activate the “Citation Alert” on the top of this page.

Ioannis A Venetis and Paraskevi K Salamaliki
Journal of Economic Studies, 2015, Volume 42, Number 4, Page 641
Atanu Ghoshray and Ashira Perera
The Manchester School, 2016, Volume 84, Number 4, Page 551

Comments (0)

Please log in or register to comment.
Log in