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

Ronald A. Babula and Daowei Zhang ()
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Ronald A. Babula: Keimyung University
Daowei Zhang: Auburn University

Empirical Economics, 2019, vol. 56, issue 3, No 13, 1097-1116

Abstract: 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.

Keywords: Commodity markets; Softwood lumber; US housing sector; Lumber prices; Lumber futures price (search for similar items in EconPapers)
JEL-codes: C32 G13 L66 Q18 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s00181-017-1377-4

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