Nonlinearity and fractional integration in the world crude oil prices

ABSTRACT

This article investigates the time-series behavior of the world crude oil prices over the period from January 1997 to May 2011 by taking into account nonlinearity and fractional integration in the same framework. As a first step, the author examines the nonlinear behavior of the data through the estimation of a two-regime threshold autoregressive model and find that world crude oil prices exhibit a nonlinear behavior. After finding nonlinearity, the author also allows disturbances to be fractionally integrated. The results point to a stationary process with long memory.

KEYWORDS:

• Crude oil prices
• fractional integration
• long memory
• nonlinearity

Acknowledgment

The author thanks Bruce Hansen for making available his Gauss codes for the TAR model and Mehmet Balcılar for kindly providing the Gauss codes for Robinson test.