Do Industrial Metals Prices Exhibit Bubble Behavior?

Abstract

Between 2004 and 2008, prices for industrial metals increased significantly but they experienced a subsequent decline after the turmoil of the financial crisis. A crucial question is if the prices of internationally traded metals have been driven by an explosive speculative bubble or if such a huge price increase was fundamentally justified. Based on data from the Dow Jones UBS Commodity Index, which uses metals traded on the London Metal Exchange and US exchanges, this study attempts to answer this question by applying the sup ADF test proposed by Phillips et al. (Int Econ Rev 52(1):201–226, 2011) which allows to test for explosive bubbles and to date the origin and collapse of the bubbles. Overall, our findings indicate that prices of industrial metals have shown explosive bubble behavior. More precisely, prices for copper and nickel have been subject to a speculative bubble around 2006 and 2008 whereas the evidence for the accumulation of a bubble in zinc prices is weak and aluminum prices do not exhibit any indication of a speculative bubble.