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Nonrenewable Resource Prices: Deterministic or Stochastic Trends?

Author

Listed:
  • Junsoo Lee
  • John A. List
  • Mark C. Strazicich

Abstract

In this paper we examine temporal properties of eleven natural resource real price series from 1870-1990. Recent studies by Ahrens and Sharma [1997], Berck and Roberts [1996], and Slade [1988], among others, find that many nonrenewable resource prices have a stochastic trend. We revisit this issue by employing a Lagrangian Multiplier unit root test that allows for two endogenously determined structural breaks with and without a quadratic trend. Contrary to previous research, we find evidence against the unit root hypothesis for all price series. Our findings support characterizing natural resource prices as stationary around deterministic trends with structural breaks. We additionally show that both pre-testing for unit roots with breaks and allowing for breaks in the forecast model can improve forecast accuracy. Overall, the results in this paper are important in both a positive and normative sense; without an appropriate understanding of the dynamics of a time series, empirical verification of theories, forecasting, and proper inference are potentially fruitless.

Suggested Citation

  • 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.
    • Handle: RePEc:apl:wpaper:05-20
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    JEL classification:

    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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