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Nonrenewable Resource Prices: Deterministic or Stochastic Trends?

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

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.

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Paper provided by Department of Economics, Appalachian State University in its series Working Papers with number 05-20.

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Date of creation: 2005
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Handle: RePEc:apl:wpaper:05-20
Contact details of provider: Postal: Thelma C. Raley Hall, Boone, North Carolina 28608
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Web page: http://www.business.appstate.edu/departments/economics/

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  1. 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.
  2. Allan Timmermann & M. Hashem Pesaran, 2003. "Small Sample Properties of Forecasts from Autoregressive Models under Structural Breaks," CESifo Working Paper Series 990, CESifo Group Munich.
  3. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  4. Eric Zivot & Donald W.K. Andrews, 1990. "Further Evidence on the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Cowles Foundation Discussion Papers 944, Cowles Foundation for Research in Economics, Yale University.
  5. Clark, Todd E. & McCracken, Michael W., 2005. "The power of tests of predictive ability in the presence of structural breaks," Journal of Econometrics, Elsevier, vol. 124(1), pages 1-31, January.
  6. Lee, Junsoo & Strazicich, Mark C, 2001. " Break Point Estimation and Spurious Rejections with Endogenous Unit Root Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(5), pages 535-58, December.
  7. Pesaran, H.M. & Timmermann, A., 2003. "How Costly is it to Ignore Breaks when Forecasting the Direction of a Time Series?," Cambridge Working Papers in Economics 0306, Faculty of Economics, University of Cambridge.
  8. Amsler, Christine & Lee, Junsoo, 1995. "An LM Test for a Unit Root in the Presence of a Structural Change," Econometric Theory, Cambridge University Press, vol. 11(02), pages 359-368, February.
  9. Nunes, Luis C & Newbold, Paul & Kuan, Chung-Ming, 1997. "Testing for Unit Roots with Breaks: Evidence on the Great Crash and the Unit Root Hypothesis Reconsidered," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(4), pages 435-48, November.
  10. Junsoo Lee & Mark C. Strazicich, 2013. "Minimum LM unit root test with one structural break," Economics Bulletin, AccessEcon, vol. 33(4), pages 2483-2492.
  11. Francis X. Diebold & Lutz Kilian, 1999. "Unit Root Tests are Useful for Selecting Forecasting Models," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-063, New York University, Leonard N. Stern School of Business-.
  12. 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.
  13. John A. List, 1999. "Have Air Pollutant Emissions Converged Among U.S. Regions? Evidence from Unit Root Tests," Southern Economic Journal, Southern Economic Association, vol. 66(1), pages 144-155, July.
  14. Pindyck, Robert S, 1980. "Uncertainty and Exhaustible Resource Markets," Journal of Political Economy, University of Chicago Press, vol. 88(6), pages 1203-25, December.
  15. Atsushi Inoue & Lutz Kilian, 2005. "In-Sample or Out-of-Sample Tests of Predictability: Which One Should We Use?," Econometric Reviews, Taylor & Francis Journals, vol. 23(4), pages 371-402.
  16. Hamilton, James D., 1996. "This is what happened to the oil price-macroeconomy relationship," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 215-220, October.
  17. Junsoo Lee & Mark C. Strazicich, 2003. "Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1082-1089, November.
  18. Labson B. Stephen & Crompton Paul L., 1993. "Common Trends in Economic Activity and Metals Demand: Cointegration and the Intensity of Use Debate," Journal of Environmental Economics and Management, Elsevier, vol. 25(2), pages 147-161, September.
  19. 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.
  20. Robin L. Lumsdaine & David H. Papell, 1997. "Multiple Trend Breaks And The Unit-Root Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 212-218, May.
  21. Dimitrios Vougas, 2003. "Reconsidering LM unit root testing," Journal of Applied Statistics, Taylor & Francis Journals, vol. 30(7), pages 727-741.
  22. Slade, Margaret E., 1988. "Grade selection under uncertainty: Least cost last and other anomalies," Journal of Environmental Economics and Management, Elsevier, vol. 15(2), pages 189-205, June.
  23. Diebold, Francis X & Senhadji, Abdelhak S, 1996. "The Uncertain Unit Root in Real GNP: Comment," American Economic Review, American Economic Association, vol. 86(5), pages 1291-98, December.
  24. Schmidt, Peter & Phillips, C B Peter, 1992. "LM Tests for a Unit Root in the Presence of Deterministic Trends," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 257-87, August.
  25. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
  26. repec:cup:etheor:v:11:y:1995:i:2:p:359-68 is not listed on IDEAS
  27. Peter C.B. Phillips & Sam Ouliaris & Joon Y. Park, 1988. "Testing for a Unit Root in the Presence of a Maintained Trend," Cowles Foundation Discussion Papers 880, Cowles Foundation for Research in Economics, Yale University.
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