TESTING VOLATILITY PERSISTENCE WITH FRACTIONAL INTEGRATIONAND COINTEGRATION IN WORLDWIDE COMMODITY MARKETS

Mariam Kamal; Luis Alberiko Gil-Alana

Authors

Mariam Kamal Basque Country University, Bilbao, Spain
Luis Alberiko Gil-Alana University of Navarra, Pamplona, Spain and Universidad Francisco de Vitoria, Madrid, Spain

Keywords:

volatility, commodity crisis, commodity prices, persistence, fractional integration, fractional cointegration.

Abstract

In this paper, we examine the volatility of commodity prices around the world using monthly data for the time period 1960–2022. During this period, there were significant economic crises that increased the prices of both energy and non-energy commodities in the short term. These past crises may provide insights into the behavior of current crises, as they generally exhibit similar patterns. We use fractional integration methods and find that the volatility for each variable exhibits mean reversion, with the effect of the shocks disappearing in the long run. While this may seem obvious, our paper is the first to empirically demonstrate this significant process of convergence using a flexible time series model. As an additional contribution, we complement our analysis by incorporating a fractional cointegration test to examine potential relationships among the commodity prices. Our findings reveal the existence of four distinct cointegrating relationships within the set of ten commodity prices. This implies that these commodities are not entirely independent and may share underlying connections that contribute to their price movements over time. This valuable insight further enriches our understanding of the intricate interactions within the commodity market. We conclude that although countries do not have effective policies for mitigating volatility, it is only a short-term phenomenon that will disappear in the long term.

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