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Supply and demand driven oil price changes and their non-linear impact on precious metal returns: A Markov regime switching approach

Gazi Uddin (), Md Lutfur Rahman, Syed Jawad Hussain Shahzad () and Mobeen Ur Rehman

Energy Economics, 2018, vol. 73, issue C, 108-121

Abstract: This paper examines the nonlinear effect of oil price shocks on precious metal returns using Markov regime switching regression. We use Ready's (2018) approach to decompose oil price changes into supply, demand, and risk driven shocks. Results indicate a significant positive impact of demand and supply shocks and a negative impact of risk shocks on precious metal returns. Although we find evidence of switching between low and high volatility regimes, we do not find strong regime effect on supply or demand shocks' contemporaneous relationship with precious metal returns. However, risk shocks' influence on precious metal returns is strongly regime dependent. These results generally hold for different distributional specification of error terms.

Keywords: Oil; Precious metal; Demand and supply shocks; VAR; Markov regime switching regression (search for similar items in EconPapers)
JEL-codes: C24 C53 L61 Q43 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.eneco.2018.05.024

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