Do Crude Oil Prices Contain Nonlinear Unit roots with Random Coefficients?

Document Type : Scientific paper

Authors

1 Ph.D. Candidate. in Management, Faculty of Administrative Sciences and Economics, University of Isfahan, Isfahan, Iran

2 Ph.D. Candidate. in Management, Department of Finance and Banking, Faculty of Management and Accounting, Allameh Tabataba’i University, Tehran, Iran

Abstract

Modeling of oil price behavior depends on whether we distinguish the observed data as examples of deterministic or random trend processes. The distinction between these processes is crucial because of the long-term response of data series to shocks. Generally, in standard significance tests, the null hypothesis is tested for the difference between the insignificant and significant hypotheses. In the present study, to investigate the root of the non-difference stationary unit from Bayesian methods, we estimate the RCAR model considered for oil prices. The results of this study show that despite confirming the unit root in oil price data, it is not clear that whether a random step process is suitable for predicting Brent crude oil prices or not because confirming the existence of a random unit root does not necessarily mean that the crude oil spot prices follow a Brownian process. Therefore, it is not possible to conclude from such results that the efficiency of the oil market is insignificant. However, because the unit root in the crude oil data is random, it does not persist with the differentiation of the crude oil data; therefore, the use of the differentiated variable in conventional co-integration models will be incorrect. Also, because the crude oil is the input of many industries, this anonymity could be transferred to other macroeconomic variables. Therefore, theories of business cycles that portray temporary economic shocks will have weak support.

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References

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Macroeconomics Research Letter
Volume 16, Issue 32
December 2021
Pages 91-116

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History

  • Receive Date: 30 August 2022
  • Revise Date: 26 November 2022
  • Accept Date: 28 November 2022

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