Asymmetric and nonlinear pass‐through relationship between oil and other commodities

• Published date: 01 September 2016
• DOI: http://doi.org/10.1111/opec.12078
• Date: 01 September 2016
• Author: Manuchehr Irandoust

Asymmetric and nonlinear pass-through

relationship between oil and other

commodities

Manuchehr Irandoust

School of Business, Engineering and Science, Halmstad University, PO Box 823, SE-30118 Halmstad,

Sweden. Emails: manuchehr.eirandoust@hh.se, manuch.dost@gmail.com

Abstract

There are very few studies on the asymmetric relationship between crude oil prices and the prices

of other commodities. Using the recently developed multivariate hidden cointegration technique,

the results indicate that there exists a long-run and asymmetric relationship between crude oil

prices and the price of other commodities. The policy implication of our results is that crude oil as

a strategic resource plays an important role in commodity markets and regardless of whether the

commodity market is in a boom period or a downturn, the volatility of crude oil prices always

affects other commodity prices.

1. Introduction

It is interesting to find out the main determinants of long-term commodity price

movements. The oil market has experienced high fluctuations since the first oil crises

back in the 1970s. In the last few years, oil price changes have intensified the quest for

answers to concerns on growing food and commodity price volatility (Balcombe et al.,

2007; Peri and Baldi, 2010; Natanelov et al., 2011). High commodity prices, whether or

not related to oil prices, have significant effects on purchasing power and economic

growth (Chaudhuri, 2001; Zhang et al., 2010). The aim of this study was to examine the

effect of crude oil price changes on the behaviour of commodity prices using the recently

developed multivariate hidden cointegration technique (Granger and Yoon, 2002).

The basic idea of cointegration is that when two or more time series move closely

together in the long run, although the series themselves are trended, the difference

between them is constant. This implies the cointegrating series as a long-run equilibrium

relationship where the difference among the series being stationary. The term

equilibrium in this case suggests a relationship which, on average, has been held by a

set of variables for a long period (Hall and Hendry, 1988). Although standard

JEL classification: Q11, Q21, Q41.

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