Non-renewable resource prices: Deterministic or stochastic trends?

Abstract

In this paper, we examine temporal properties of 11 natural resource real price series from 1870 to 1990. Recent studies by Ahrens and Sharma [Trends in natural resource commodity prices: deterministic or stochastic? J. Environ. Econom. Manage. 33(1997)59-74], Berck and Roberts [Natural resource prices: will they ever turn up? J. Environ. Econom. Manage. 31(1996)65-78], and Slade [Grade selection under uncertainty: least cost last and other anomalies, J. Environ. Econom. Manage. 15(1988)189-205], among others, find that many non-renewable 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. r 2005 Elsevier Inc. All rights reserved. JEL classification: Q31; C12; C53

A Note on the Oil Price Trend and GARCH Shocks

“…Evidence of the deterministic trend also provides support for optimal depletion models of Hotelling (1931). Our main findings are consistent with those of Lee, List, and Strazicich (2006). In terms of methodology, the findings in this paper contribute to the growing literature that suggests price models can be improved by allowing for a nonlinear specification.…”

150 Years of Boom and Bust: What Drives Mineral Commodity Prices?

“…My results also contribute to the literature on the long-run trends in commodities that is not conclusive so far (see Pindyck, 1999;Lee et al, 2006;Slade, 1982). I provide evidence for non-increasing mineral commodity prices, controlling for the effects of different shocks on prices.…”

150 Years of Boom and Bust: What Drives Mineral Commodity Prices?

“…They provide long-run evidence for non-increasing non-renewable resource prices under the assumption of a deterministic trend, and contribute to a literature that is certainly not conclusive (see Pindyck, 1999;Lee et al, 2006;Slade, 1982).…”