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Commodity Pricing Volatility Shifts in a Highly Turbulent Time Period. A Time-varying Transition Probability Markov Switching Analysis

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  • Giulio Cifarelli

Abstract

The pricing of six highly liquid futures commodity contracts is investigated using a Markov switching procedure. The data set spans an exceptionally turbulent time period, characterized by a complex interplay of economic/financial and political shocks. Markov switching analysis exploits time series nonlinearity in order to identify the nature and the timing of the implicit changes of regime. Building on a HAM framework, we use the time varying parameterization of the transition probability estimates in order to link these shifts to exogenous variables. We provide in this way additional information on the co-movement of the time series and on their eventual regime shifts. The WTI oil futures price and DJIA stock index turn out to be the main common drivers of the changes in regime of most futures commodity prices.

Suggested Citation

  • Giulio Cifarelli, 2023. "Commodity Pricing Volatility Shifts in a Highly Turbulent Time Period. A Time-varying Transition Probability Markov Switching Analysis," Working Papers - Economics wp2023_11.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    • Handle: RePEc:frz:wpaper:wp2023_11.rdf
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    References listed on IDEAS

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    More about this item

    Keywords

    HAM Commodity pricing; Markov Switching; Time-Varying Transition Probabilities;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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