Non-linear dynamics in international resource markets: Evidence from regime switching approach

Abstract

This paper examines the nonstationary and nonlinear features of the non-renewable resource markets: the crude oil (US West Texas Intermediate and UK Brent), bituminous coal and natural gas markets. In particular, we achieve this goal by using the Markov switching unit root regression. This approach is attractive because it allows price to switch between stationary and nonstationary regimes (partial nonstationarity). It also allows price to switch between two stationary regimes (varied stationarity) or to switch between two nonstationary regimes (varied nonstationarity). The results of a range of non-linear tests show that the independently and identically distributed (i.i.d.) hypothesis or the random walk hypothesis is untenable for the non-renewable resource prices. The results from the Markov regression indicate that, in the cases of US West Texas Intermediate, UK Brent as well as bituminous coal, prices are characterized by the local nonstationarity in both regimes, and therefore varied nonstationarity is sustained. The price of natural gas is characterized by partial nonstationarity, indicating that this market is inconsistent with the efficient market.