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A New Look at Copper Markets: A Regime-Switching Jump Model

Wing Chan () and Denise Young

No 2009-13, Working Papers from University of Alberta, Department of Economics

Abstract: 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.

Keywords: regime switching; Poisson jump; GARCH volatility; copper futures (search for similar items in EconPapers)
JEL-codes: C32 C53 G13 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2009-03-17
New Economics Papers: this item is included in nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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