NDLI: Modelling nonlinearities in commodity prices using smooth transition regression models with exogenous transition variables

Content Provider	Springer Nature Link
Author	Fahmy, Hany
Copyright Year	2014
Abstract	This paper investigates the nonlinearities in commodity prices using smooth transition regression (STR) models. What distinguishes this paper from the majority of the studies in the smooth transition literature is its use of exogenous transition variables, in addition to the standard autoregressive lags of the dependent variable, in modelling the regime switching behavior of commodity prices. Two exogenous transition variables were found successful in capturing the regime switching behavior of commodity prices: inflation rate and oil price. Inflation rate was capable of capturing the early dynamics (between 1900 and 1950) of the commodity index whereas oil price captured the late ones (between 1970 and 2007). This result motivates the use of common exogenous threshold variables in regime switching models in general and, in particular, the use of inflation and oil price in the STR model when applied to an index of commodity prices. The paper also provides further insight on the issue of co-movement of commodity prices by classifying individual commodities into groups according to their border price (an issue that has been ignored in previous studies on commodity prices), and then trying to find the best common transition variable that can explain the dynamic behavior of each group. The results show that, for traded commodities, individual price series recorded on a free on board basis are driven by macroeconomic news in the exporting country. On the other hand, individual price series recorded on a cost and freight basis are driven by oil price and macroeconomic news variables in the importing country.
Starting Page	577
Ending Page	600
Page Count	24
File Format	PDF
ISSN	16182510
Journal	Statistical Methods and Applications
Volume Number	23
Issue Number	4
e-ISSN	1613981X
Language	English
Publisher	Springer Berlin Heidelberg
Publisher Date	2014-07-23
Publisher Place	Berlin, Heidelberg
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Smooth transition regression models Commodity prices Threshold models Regime switching models Border prices Free on board Cost and freight Oil price Inflation Statistics Statistics for Business/Economics/Mathematical Finance/Insurance Economic Theory
Content Type	Text
Resource Type	Article
Subject	Statistics and Probability Statistics, Probability and Uncertainty

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