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Grain prices, oil prices, and multiple smooth breaks in a VAR

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  • Enders Walter

    (Department of Economics, Finance and Legal Studies, University of Alabama, Tuscaloosa, AL 35487, USA)

  • Jones Paul

    (Social Science Division, Seaver College, Pepperdine University, Malibu, CA 92063, USA)

Abstract

Ignored structural breaks in a VAR result in a misspecified model such that Granger causality tests are improperly sized; there is a bias towards a rejection of the null hypothesis of non-causality even when the null is correct. Instead of modeling structural breaks as being sharp, changes in the relationship between the maize and petroleum markets are likely to have occurred gradually. We show the flexible Fourier form has good size and power properties in testing for smooth structural change in a VAR. When applied to a VAR including maize and oil prices, we uncover important linkages between the two markets.

Suggested Citation

  • Enders Walter & Jones Paul, 2016. "Grain prices, oil prices, and multiple smooth breaks in a VAR," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 20(4), pages 399-419, September.
    • Handle: RePEc:bpj:sndecm:v:20:y:2016:i:4:p:399-419:n:3
    DOI: 10.1515/snde-2014-0101
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    References listed on IDEAS

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    1. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
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