Speed of adjustment in energy and metal prices: Evidence from India

Abstract

In this paper, we empirically estimate the time-varying speed of adjustment (SOA) in commodity (crude oil, natural gas, aluminium, copper and zinc) prices in the Indian context. Using a price adjustment model based upon the theory of storage, we also investigate the factors affecting the speed of adjustment in commodity pricing. We further argue that the commodity prices exhibit bubbles similar to asset price bubbles. Our results indicate that the SOA for energy prices is around 41.8% while it is around 31.6% for metals’ prices. Our results further indicate that on an average, during bubbles the SOA is lower than days with no bubbles. Finally, we show that bubbles help explain 4.2%, 6.1%, and 3.8%, and of the SOA for aluminium, oil, and gas prices, respectively. As a measure of robustness, we conduct the same analysis on the global data and show that our results in the global context are qualitatively similar to those reported for the Indian context. Further, our results are also robust to a range of additional tests.