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A Note on the Oil Price Trend and GARCH Shocks

Abstract:
This paper investigates the trend in the monthly real price of oil between 1990 and 2008 with a generalized autoregressive conditional heteroskedasticity (GARCH) model. Trend and volatility are estimated jointly with the maximum likelihood estimation. There is long persistence in the variance of oil price shocks, and a GARCH unit root (GUR) test can potentially yield a significant power gain relative to the augmented Dickey-Fuller (ADF) test. After allowing for nonlinearity, the evidence supports a deterministic trend in the price of oil. The deterministic trend implies that influence of a price shock is transitory and policy efforts to restore a predictable price after a shock would be unwarranted in the long run.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Energy Modeling – Energy Data, Modeling, and Policy Analysis

JEL Codes: C58: Financial Econometrics, Q41: Energy: Demand and Supply; Prices, Q31: Nonrenewable Resources and Conservation: Demand and Supply; Prices, C51: Model Construction and Estimation, Q43: Energy and the Macroeconomy, Q35: Hydrocarbon Resources

Keywords: Oil Price, Volatility, Trend, GARCH, Fourier Form

DOI: 10.5547/ISSN0195-6574-EJ-Vol31-No3-8

Published in Volume 31, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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