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Assessing the role of futures position substitutability in a monthly model of factor demand for softwood lumber

Author

Listed:
  • Ronald A. Babula

    (Keimyung University)

  • Daowei Zhang

    (Auburn University
    FAO Forestry Department)

Abstract

We combine cointegrated VAR modeling with basic neoclassical production theory in a new way that tests for, and illuminates the empirical nature of, the monthly US housing sector’s factor demand for softwood lumber. Statistical evidence strongly suggests that the US housing sector has a Hicksian Cobb-Douglas lumber factor demand arising from applying Shephard’s lemma to the sector’s cost function and that the US housing sector’s residential homebuilding agents treat lumber and lumber futures positions, not as identical factors, but as separate and time-differentiated, factor substitutes. Evidence suggests that homebuilding agents shift between demands for the two substitutes based on movements in the lumber/lumber futures price ratio. This establishes a theoretical link between a number of futures price-impacting market trends and events of great concern to US regulators and the underlying lumber commodity market through effects on futures price.

Suggested Citation

  • Ronald A. Babula & Daowei Zhang, 2019. "Assessing the role of futures position substitutability in a monthly model of factor demand for softwood lumber," Empirical Economics, Springer, vol. 56(3), pages 1097-1116, March.
    • Handle: RePEc:spr:empeco:v:56:y:2019:i:3:d:10.1007_s00181-017-1377-4
    DOI: 10.1007/s00181-017-1377-4
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    References listed on IDEAS

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    More about this item

    Keywords

    Commodity markets; Softwood lumber; US housing sector; Lumber prices; Lumber futures price;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy

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