On Jumps and ARCH Effects in Natural Resource Prices: An Application to Pacific Northwest Stumpage Prices

Jean-Daniel Saphores, Lynda Khalaf and Denis Pelletier

American Journal of Agricultural Economics, 2002, vol. 84, issue 2, 387-400

Abstract: Continuous-time models of natural resource prices usually preclude the possibility of large changes (jumps) resulting from unexpected events. To test for the presence of jumps and/or ARCH effects, we combine bounds and the Monte Carlo test technique to obtain finite-sample, level-exact p-values. We apply this methodology to stumpage prices from the Pacific Northwest and find evidence of jumps and ARCH effects. To assess the impact of neglecting jumps on the decision to harvest old-growth timber, we develop an autonomous, infinite-horizon stopping model for which we provide a new method of resolution. Our numerical results show the importance of modeling jumps explicitly. Copyright 2002, Oxford University Press.

Date: 2002
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