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Prices of Durable Nonrenewable Natural Resources under Stochastic Investment Opportunities

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  • Calvin Atewamba
  • Gérard Gaudet

Abstract

We take a capital asset pricing approach to the determination of the price of a nonrenewable natural resource in the case where the resource is durable, in the sense that once extracted it becomes a productive asset held above ground. The portfolio choice is then made up of the following assets: a stock of nonrenewable resource held in the ground that yields no dividend, a stock of resources held above ground that yields a dividend in the form of a flow of productive services, and a stock of composite good that can be held either in the form of productive capital or of a bond whose return is given. There is a stochastic element to the rate of change of productivity in both the production of the composite good and in the extraction of the resource. It is shown that the resulting prediction for the price path of the resource differs considerably from the one that follows from the elementary Hotelling model and that no unambiguous prediction can be drawn analytically about the pattern of behavior of that price path.

Suggested Citation

  • Calvin Atewamba & Gérard Gaudet, 2012. "Prices of Durable Nonrenewable Natural Resources under Stochastic Investment Opportunities," Cahiers de recherche 02-2012, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  • Handle: RePEc:mtl:montec:02-2012
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    References listed on IDEAS

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    1. Margaret E. Slade & Henry Thille, 2009. "Whither Hotelling: Tests of the Theory of Exhaustible Resources," Annual Review of Resource Economics, Annual Reviews, vol. 1(1), pages 239-259, September.
    2. Margaret E. Slade & Henry Thille, 1997. "Hotelling Confronts CAPM: A Test of the Theory of Exhaustible Resources," Canadian Journal of Economics, Canadian Economics Association, vol. 30(3), pages 685-708, August.
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    5. Gaudet, Gerard & Khadr, Ali M, 1991. "The Evolution of Natural Resource Prices under Stochastic Investment Opportunities: An Intertemporal Asset-Pricing Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(2), pages 441-455, May.
    6. Young, Denise & Ryan, David L., 1996. "Empirical testing of a risk-adjusted Hotelling model," Resource and Energy Economics, Elsevier, vol. 18(3), pages 265-289, October.
    7. David Levhari & Robert S. Pindyck, 1981. "The Pricing of Durable Exhaustible Resources," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 96(3), pages 365-377.
    8. Harold Hotelling, 1931. "The Economics of Exhaustible Resources," Journal of Political Economy, University of Chicago Press, vol. 39(2), pages 137-137.
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    Cited by:

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    3. van den Bremer, Ton & van der Ploeg, Frederick & Wills, Samuel, 2016. "The Elephant In The Ground: Managing Oil And Sovereign Wealth," European Economic Review, Elsevier, vol. 82(C), pages 113-131.

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    More about this item

    JEL classification:

    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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