Nonlinear Relationship of Crude Oil Price and Primary Commodity Prices
In this paper, we examine the effect of crude oil price to the primary commodity prices namely lamb (other foods), olive oil (fats and oils), rubber (raw materials), tea (beverages), wheat (cereals) and zinc (metals) from January 1980 until November 2008. We employed two regimes multivariate Markov switching vector autoregressive (MS-VAR) model with regime shifts in the mean and variance. Using the LR test, the linearity in the commodity series can be rejected which implies there is regime switching structure. The commodity price series are well fitted by the MS-VAR (1) model. The MS-VAR (1) model also manages to capture the behaviour of the crude oil price and the primary commodity prices. Regime 1 capture the period where the commodity prices decrease and regime 2 capture the period where the commodity prices increase. It shows that when crude oil price increase, the primary commodity prices follows to increase. When crude oil price decrease, the primary commodity prices also decrease. We can conclude that crude oil price does effects the prices of primary commodity and there is nonlinear relationship between crude oil price and primary commodity prices.
Multivariate Markov switching vector autoregressive (MS-VAR) model, crude oil price, primary commodity prices.
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