On the Stationarity of Exhaustible Natural Resource Prices: Misspecification Effects Arising from Incomplete Models

Kourogenis, Nikolaos and Koundouri, Phoebe (2010): On the Stationarity of Exhaustible Natural Resource Prices: Misspecification Effects Arising from Incomplete Models. Published in:

Abstract

In this paper we examine whether the real prices of eleven natural resource commodities exhibit stochastic or deterministic trends. A common methodological feature in the relevant empirical literature, most of which published in the Journal of Environmental Economics and Management, has been so far the application of univariate tests for unit roots. In these tests the real price for each commodity is tested for unit roots in isolation from all other natural resource commodity prices. We claim that this approach is likely to produce spurious inferences concerning the true number of unit roots, since it ignores any possible dynamic interactions among the available set of nominal prices. We suggest that the hypothesis of stationarity of real commodity prices should be properly defined and tested within a multivariate error correction model, which explicitly accounts for all possible linear interdependencies among the series involved. In such a framework, the stationarity of the real prices that participate in the system depends on whether the system exhibits sufficient cointegration with a specific ointegration matrix. Our empirical results suggest that within this multivariate framework, eight of eleven real prices of exhaustible natural resource commodities satisfy the restrictions for being stationary. On the contrary, all of these eleven real prices appear to be non-stationary, when the unit root hypothesis is tested in the context of incomplete models.

• Item Type: MPRA Paper
• Language: English
• Keywords: Natural resource commodity price, Cointegration, Trend stationarity, Vector error correction model
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C36 - Instrumental Variables (IV) Estimation; Y - Miscellaneous Categories > Y1 - Data: Tables and Charts > Y10 - Data: Tables and Charts

References

[1] W. A. Ahrens and V. R. Sharma, Trends in natural resource commodity prices: deterministic or stochastic?, J. Environ. Econ. Manage. 33, 59-74 (1997).

[2] H. J. Barnett and C. Morse, Scarcity and Growth: The Economics of Natural Resource Availability, Johns Hopkins Press, Baltimore (1963).

[3] P. Berck and M. Roberts, Natural resource prices: will they ever turn up?, J. Environ. Econ. Manage. 31, 65-78 (1996).

[4] G. Cavaliere and A. M. R. Taylor, Testing for unit roots in time series models with non-stationary volatility, J. Econometrics 140, 919-947 (2007).

[5] G. Elliot, T. J. Rothenberg and J. H. Stock, E¢ cient Tests for an Autoregressive Unit Root, Econometrica 64, 813-836 (1996).

[6] H. Hotelling, The Economics of Exhaustible Resources, J. Polit. Economy 39, 137-175 (1931).

[7] S. Johansen, Statistical analysis of cointegration vectors, J. Econ. Dynam. Control 12, 231-254 (1988).

[8] S. Johansen, Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models, Econometrica, 59, 1551-1580 (1991).

[9] S. Johansen, The role of the constant and linear terms in cointegration analysis of nonstationary variables, Econometric Rev. 13, 205-229 (1994).

[10] D. Kwiatkowski, P. C. B. Phillips, P. Schmidt and Y. Shin, Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?, J. Econometrics 54, 159-178 (1992).

[11] J. Lee, J. A. List and M. C. Strazicich, Non-renewable resource prices: Deterministic or stochastic trends?, J. Environ. Econ. Manage. 51, 354-370 (2006).

[12] C.-Y. C. Lin and G. Wagner, Steady-state growth in a Hotelling model of resource extraction, J. Environ. Econ. Manage. 54, 68-83 (2007).

[13] J. Livernois, The Empirical SigniÖcance of the Hotelling Rule, Review of Environmental Economics and Policy, 1-20 (2008).

[14] R. L. Lumsdaine and D. H. Papell, Multiple Trend Breaks and the Unit-Root Hypothesis, Rev. Econ. Statist. 79, 212-218 (1997).

[15] T. R. Malthus, An essay on the principle of population as it a§ects the future improvement of society, Ward-Lock, London (1798).

[16] W. K. Newey and K. D. West, Automatic Lag Selection in Covariance Matrix Estimation, Rev. Econ. Stud. 61, 631-653 (1994).

[17] S. Ng and P. Perron, Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power, Econometrica 69, 1519-1554 (2001).

[18] P. Perron, The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis, Econometrica 57, 1361-1401 (1989).

[19] P. Perron, Further evidence on breaking trend functions in macroeconomic variables, J. Econometrics 80, 355-385, (1997).

[20] D. Ricardo, Principles of Political Economy and Taxation, Reprint, Every- man, London (1926).

[21] G. Schwarz, Estimating the Dimension of a Model, Ann. Statist. 6, 461-464 (1978).

[22] M. E. Slade, Trends in natural-resource commodity prices: an analysis of the time domain, J. Environ. Econ. Manage. 9, 122-137, (1982).

[23] M. E. Slade, Grade selection under uncertainty: least cost last and other anomalies, J. Environ. Econ. Manage. 15, 189-205 (1988).

[24] M. E. Slade and H. Thille, Hotelling Confronts CAPM: A Test of the Theory of Exhaustible Resources, Can. J. Econ. 30, 685-708 (1997).

[25] M. E. Slade and H. Thille, Whither Hotelling: Tests of the Theory of Exhaustible Resources, Annu. Rev. Resource Econ. 1, 239-260 (2009), doi:10.1146/annurev.resource.050708.144223

[26] V. K. Smith, Natural Resource Scarcity: A Statistical Analysis, Rev. Econ. Statist. 61, 423-427 (1979).

[27] E. Zivot and D. W. K. Andrews, Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis, J. Bus. Econ. Statist. 20, 25-44 (1992).