Nonrenewable Resource Prices: Deterministic or Stochastic Trends?

Junsoo Lee, John List () and Mark Strazicich ()

No 05-20, Working Papers from Department of Economics, Appalachian State University

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.

Date: Written 2005
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Working Paper: Nonrenewable Resource Prices: Deterministic or Stochastic Trends? (2005)
Journal Article: Non-renewable resource prices: Deterministic or stochastic trends? (2006)
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