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How Persistent are Shocks to Energy Prices?

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  • Atanu Ghoshray

Abstract

Whether shocks to energy prices are permanent or transitory remains a contentious issue. This may result from mis-specification of the econometric tests, due for example to the uncertainty over the presence of a trend, or the possible presence of structural breaks and non-stationary volatility in the data. This paper makes a contribution by addressing the underlying characteristics of energy price data that influence such econometric tests. First, we detect whether the data are characterised by non-stationary volatility and possible trend breaks. The next step involves employing novel unit root tests that unify the underlying characteristics, such as trend break and/or nonstationary volatility, of the data. We conclude shocks to energy prices are not transitory. We further decompose a benchmark oil price and its demand and supply components into their permanent and transitory components and compute the cross correlations to find that they conform to standard theories of commodity storage models.

Suggested Citation

  • Atanu Ghoshray, 2018. "How Persistent are Shocks to Energy Prices?," The Energy Journal, , vol. 39(1_suppl), pages 175-192, June.
    • Handle: RePEc:sae:enejou:v:39:y:2018:i:1_suppl:p:175-192
    DOI: 10.5547/01956574.39.SI1.agho
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    1. Narayan, Paresh Kumar & Liu, Ruipeng, 2011. "Are shocks to commodity prices persistent?," Applied Energy, Elsevier, vol. 88(1), pages 409-416, January.
    2. Mohitosh Kejriwal & Pierre Perron, 2010. "A sequential procedure to determine the number of breaks in trend with an integrated or stationary noise component," Journal of Time Series Analysis, Wiley Blackwell, vol. 31(5), pages 305-328, September.
    3. Cavaliere, Giuseppe & Harvey, David I. & Leybourne, Stephen J. & Taylor, A.M. Robert, 2011. "Testing For Unit Roots In The Presence Of A Possible Break In Trend And Nonstationary Volatility," Econometric Theory, Cambridge University Press, vol. 27(5), pages 957-991, October.
    4. Maslyuk, Svetlana & Smyth, Russell, 2008. "Unit root properties of crude oil spot and futures prices," Energy Policy, Elsevier, vol. 36(7), pages 2591-2600, July.
    5. Sun, Jingwei & Shi, Wendong, 2015. "Breaks, trends, and unit roots in spot prices for crude oil and petroleum products," Energy Economics, Elsevier, vol. 50(C), pages 169-177.
    6. Harvey, David I. & Leybourne, Stephen J. & Taylor, A.M. Robert, 2009. "Unit Root Testing In Practice: Dealing With Uncertainty Over The Trend And Initial Condition," Econometric Theory, Cambridge University Press, vol. 25(3), pages 587-636, June.
    7. Narayan, Paresh Kumar & Liu, Ruipeng, 2015. "A unit root model for trending time-series energy variables," Energy Economics, Elsevier, vol. 50(C), pages 391-402.
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    Cited by:

    1. Wang, Yudong & Hao, Xianfeng, 2023. "Forecasting the real prices of crude oil: What is the role of parameter instability?," Energy Economics, Elsevier, vol. 117(C).
    2. Francesco Corsello & Marianna Riggi, 2023. "Inflation is not equal for all: the heterogenous effects of energy shocks," Temi di discussione (Economic working papers) 1429, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    Energy prices; volatility; persistence; structural breaks;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General

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