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Stationarity Changes in Long-Run Fossil Resource Prices: Evidence from Persistence Break Testing

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  • Aleksandar Zaklan
  • Jan Abrell
  • Anne Neumann

Abstract

This paper considers the question of whether changes in persistence have occurred during the long-run evolution of U.S. prices of the non-renewable energy resources crude oil, natural gas and bituminous coal. Our main contribution is to allow for a structural break when testing for a break in persistence, thus disentangling the effect of a deterministic break from that of a stochastic break and advancing the existing literature on the persistence properties of non-renewable resource prices. The results clearly demonstrate the importance of specifying a structural break when testing for breaks in persistence, whereas our findings are robust to the exact date of the structural break. Our analysis yields that coal and natural gas prices are trend stationary throughout their evolution, while oil prices exhibit a break in persistence during the 1970s. The findings suggest that especially the coal market has remained fundamentals-driven, whereas for the oil market exogenous shocks have become dominant. Thus, our results are consequential for the treatment of energy resource prices in both causal analysis and forecasting.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.379283.de/dp1152.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1152.

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Length: 17 p.
Date of creation: 2011
Date of revision:
Handle: RePEc:diw:diwwpp:dp1152

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Keywords: non-renewable resource prices; primary energy; persistence; structural breaks;

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  1. Pindyck, Robert S., 1998. "The long-run evolution of energy prices," Working papers WP 4044-98., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Junsoo Lee & Mark C. Strazicich, 2004. "Minimum LM Unit Root Test with One Structural Break," Working Papers 04-17, Department of Economics, Appalachian State University.
  3. Busetti, Fabio & Taylor, A. M. Robert, 2004. "Tests of stationarity against a change in persistence," Journal of Econometrics, Elsevier, vol. 123(1), pages 33-66, November.
  4. Ahrens, W. Ashley & Sharma, Vijaya R., 1997. "Trends in Natural Resource Commodity Prices: Deterministic or Stochastic?," Journal of Environmental Economics and Management, Elsevier, vol. 33(1), pages 59-74, May.
  5. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
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  8. Junsoo Lee & John A. List & Mark C. Strazicich, 2005. "Nonrenewable Resource Prices: Deterministic or Stochastic Trends?," Working Papers 05-20, Department of Economics, Appalachian State University.
  9. Giuseppe Cavaliere & A. M. Robert Taylor, 2006. "Testing for a change in persistence in the presence of non-stationary volatility," Discussion Papers 06/04, University of Nottingham, Granger Centre for Time Series Econometrics.
  10. Slade, Margaret E., 1982. "Trends in natural-resource commodity prices: An analysis of the time domain," Journal of Environmental Economics and Management, Elsevier, vol. 9(2), pages 122-137, June.
  11. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
  12. James D. Hamilton, 2011. "Historical Oil Shocks," NBER Working Papers 16790, National Bureau of Economic Research, Inc.
  13. Kim, Jae-Young, 2000. "Detection of change in persistence of a linear time series," Journal of Econometrics, Elsevier, vol. 95(1), pages 97-116, March.
  14. Jeffrey A. Krautkraemer, 1998. "Nonrenewable Resource Scarcity," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 2065-2107, December.
  15. Berck, Peter & Roberts, Michael, 1996. "Natural Resource Prices: Will They Ever Turn Up?," Journal of Environmental Economics and Management, Elsevier, vol. 31(1), pages 65-78, July.
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