Are Energy Commodity Price Shocks Persistent? Evidence From Smooth Breaks and Common Factors in Panel Data

Abstract

Whether shocks to energy prices are permanent or temporary is an important research question for researchers, investors, and policy makers. The main objective of this study is to analyze whether shocks to oil, natural gas and coal prices are permanent or temporary. For oil, Brent, Dubai and WTI oil prices; for coal, Australian coal, and South African coal; and for natural gas, LNG Asia, EU natural gas and US Henry Hub gas prices are used. A data set of monthly prices (1984:01-2023:05) is used. In contrast to the literature, price shocks are analyzed taking into account structural changes and common factors using the methodologies of Bai and Carrion-I-Silvestre (2009) and Nazlioglu etal. (2023). As a result of the empirical findings, the unit root test with sharp break suggests that price shocks are permanent, while the unit root test with smooth break suggests that shocks to energy prices are transitory. The results of the analysis show that the changes in energy prices may differ according to the type of structural break (sharp/smooth).