Time-Varying Causality between Oil and Commodity Prices in the Presence of Structural Breaks and Nonlinearity

Rangan Gupta, Gbeada Seu Epse Kean, Mpho Tsebe, Nthabiseng Tsoanamatsie () and João Sato ()
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Gbeada Seu Epse Kean: Department of Economics, University of Pretoria
Mpho Tsebe: Department of Economics, University of Pretoria
João Sato: Center of Mathematics, Computation and Cognition, Universidade Federal do ABC,Brazil.

No 201469, Working Papers from University of Pretoria, Department of Economics

Abstract: The recent commodity price boom has spurred interest to understand determinants of commodity price movements. This paper investigates the causal relationship between oil prices and the prices of 25 other commodities, which include both metals and agricultural products, in the presence of instability and nonlinearity. For this purpose, we make use of a long annual time series dataset spanning from 1900 to 2011, and analyze time-varying Granger causality test, since the inference drawn based on linear Granger causality tests could be invalid due to structural breaks and nonlinearity – which we show are present in the relationship between the variables of interest. We find that, under the case of time-varying causality there are fewer rejections of the null, than under the standard linear Granger causality test, thus highlighting the importance of accounting for instability and nonlinearity. Relying on the time-varying causality test, we observe stronger evidence of other commodity prices in predicting (in-sample) oil prices (15 cases) than the other way around (7 cases).

Keywords: Oil prices; commodity prices; stability; causality; linear; time-varying (search for similar items in EconPapers)
JEL-codes: C32 F2 G00 Q11 Q47 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2014-11
New Economics Papers: this item is included in nep-agr and nep-ene
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:pre:wpaper:201469

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