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Studies in Nonlinear Dynamics & Econometrics

Ed. by Mizrach, Bruce

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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


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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.

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