Nonrenewable Resource Prices: Deterministic or Stochastic Trends?

42 Pages Posted: 23 Aug 2005 Last revised: 23 May 2021

See all articles by Junsoo Lee

Junsoo Lee

University of Alabama - Department of Economics, Finance and Legal Studies

John A. List

University of Chicago - Department of Economics

Mark C. Strazicich

Appalachian State University - Department of Economics

Date Written: July 2005

Abstract

In this paper we examine temporal properties of eleven natural resource real price series from 1870-1990 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. This result is important in both a positive and normative sense. For example, without an appropriate understanding of the dynamics of a time series, empirical verification of theories, forecasting, and proper inference are potentially fruitless. More generally, we show that both pre-testing for unit roots with breaks and allowing for breaks in the forecast model can improve forecast accuracy.

Suggested Citation

Lee, Junsoo and List, John A. and Strazicich, Mark C., Nonrenewable Resource Prices: Deterministic or Stochastic Trends? (July 2005). NBER Working Paper No. w11487, Available at SSRN: https://ssrn.com/abstract=762766

Junsoo Lee

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL Alabama 35487
United States
2053488978 (Phone)

John A. List (Contact Author)

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States

Mark C. Strazicich

Appalachian State University - Department of Economics ( email )

Boone, NC 28608
United States

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