Non-renewable resource prices. A robust evaluation from the stationarity perspective

Presno, María José and Landajo, Manuel and Fernández, Paula (2012): Non-renewable resource prices. A robust evaluation from the stationarity perspective.

Abstract

The bulk of the literature investigating persistence properties of non-renewable resource prices series has focused on application of unit root tests. This paper contributes to the debate, applying a methodology which allows (1) robust detection of the presence and (if so) the number of changes, (2) inference on stationarity of the series, and (3) estimation of change locations. In contrast to previous papers, the analysis is carried out from the perspective of stationarity testing, incorporating quadratic trends and the possibility of smooth changes. For a classical database, we find significant evidence of trend stationarity in most of the series, suggesting that shocks are mostly of a transitory nature. Exceptions are silver and natural gas, with stationarity being rejected for all the specifications considered in the paper. Finally, the knowledge of the stochastic characteristics of the series allows robust detection of change points which appear to be related to economic events.

• Item Type: MPRA Paper
• Language: English
• Keywords: non-renewable resource prices, structural changes, stationarity test, sequential procedure
• Subjects: Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q3 - Nonrenewable Resources and Conservation > Q31 - Demand and Supply ; Prices; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: General

References

Agbeyegbe, T.D. (1993): “The stochastic behaviour of mineral-commodity prices”, in P.C.B. Phillips (Ed.), Models. Methods and Applications in Econometrics: Essays in Honor of A.R. Bergstrom, Blackwell Science, Oxford, 1993. Ahrens, W.A. and Sharma, V.R. (1997): “Trends in natural resource commodity prices: deterministic or stochastic?”, Journal of Environmental Economics and Management, 33, 59-74. Bai, J. and Perron, P. (1998): “Estimating and testing linear models with multiple structural changes”, Econometrica, 66, 47-78. Balagtas, J.V. and Holt, M.T. (2009): “The commodity terms of trade, unit roots, and nonlinear alternatives: a smooth transition approach”, American Journal of Agricultural Economics, 91, 87-105. Berck, P. and Roberts, M. (1996): “Natural resource prices: will they ever turn up?”, Journal of Environmental Economics and Management, 31, 65-78. Carlin, J.F. (1999): “Tin”, in Metals Prices in the United States Through 1998, U.S. Geological Survey, 159-160. Cheung, Y.W. and Chinn, M.D. (1996): “Deterministic, stochastic and segmented trends in aggregate output: a cross-country analysis”, Oxford Economic Papers, 48, 134-162. Council of Wage and Price Stability (1976): A Study of Coal Prices. Technical Report NP 20948. Washington D.C. Davoust, R. (2008): “Gas price formation, structure and dynamics”, Institut Français des Relations Internationales. Dixit, A.K. and Pindyck, R.S. (1994): Investment under uncertainty. Princeton University Press, Princeton, N.J. Edelstein, D. (1999): “Copper”, in Metals Prices in the United States Through 1998, U.S. Geological Survey, 39-42. Ellerman, A.D. (1994): “The world price of coal”, Massachussets Institute. MIT-CEEPR 94-009WP. Elliott, G., Rothenberg, T. and Stock, J.H. (1996): “Efficient tests for an autoregressive unit root”, Econometrica, 64, 813-836. Felder, F. A. (1995); “Modelling natural gas prices as a random walk: The advantages for generation planning”, The Electricity Journal, 8, 61-67. Finn, M. (2000): “Perfect competition and the effects of energy price increases on economic activity”, Journal of Money, Credit and Banking, 52, 400-416. Ghoshray, A. (2011). “A re-examination of trends in primary commodity prices”, Journal of Development Economics, 95, 242-251. Harvey, D.I., Leybourne, S.J. and Taylor, A.M.R. (2010): “Robust methods for detecting multiple level breaks in autocorrelated time series”, Journal of Econometrics, 157, 342-358. Harvey, D.I., Leybourne, S.J. and Taylor, A.M.R. (2011): “Testing for unit roots and the impact of quadratic trends, with an application to relative primary commodity prices”, Econometric Reviews, 30, 514-547. Holland, S.P.(2008): “Modelling Peak Oil”, The Energy Journal, 29, 61-79. Kejriwal, M. and Lopez, C. (2010): “Unit roots, level shifts and trend breaks in per capita output; a robust evaluation”, MPRA paper 25204. Kejriwal, M. and Perron, P. (2010): “A sequential procedure to determine the number of breaks in trend with an integrated or stationary noise component”, Journal of Time Series Analysis, 31, 305-328. Kellard, N. and Wohar, M. (2006): “On the prevalence of trends in primary coomodity prices”, Journal of Development Economics, 79, 146-167. Kilian, L. (2009): “Not all oil price shocks are alike: disentangling demand and supply shocks in the crude oil market”, The American Economy Review, 99, 1053-1069. Krautkraemer, J.A. (1998): “Nonrenewable resource scarcity”, Journal of Economic Literature, 36, 2065-2107. Krautkraemer, J.A. (2005): “Economics of natural resource scarcity: the state of the debate”, Discussion Paper 05-14. Washington D.C.: Resources for the Future. Kuck, P.H. (1999): “Nickel”, in Metals Prices in the United States Through 1998, U.S. Geological Survey, 91-98. Kurozumi, E. (2002): “Testing for stationarity with a break”, Journal of Econometrics, 108, 63-99. Landajo, M. and Presno, M.J. (2010): “Stationarity under nonlinear models. Some asymptotic results”, Journal of Time Series Analysis, 31, 392-405. Landajo, M. and Presno, M.J. (2012): “Nonparametric pseudo-Lagrange multiplier stationarity testing”, Annals of the Institute of Statistical Mathematics, forthcoming. Lee, C. and Lee, J. (2009): “Energy prices, multiple structural breaks, and efficient market hypothesis”, Applied Energy, 86, 466-479. Lee, J., List, J.A. and Strazicich, M.C. (2006): “Non-renewable resource prices: deterministic or stochastic trends”, Journal of Environmental Economics and Management, 51, 354-370. Li, J. and Thompson, H. (2010): “A note on the oil price trend and GARCH shocks”, The Energy Journal, 31, 185-191. Mainardi, S. (1998): “Non-stationarity and structural breaks in miniral price and supply historical series”, Prague Economic Papers, vol. 1998, issue 3. Maslyuk, S. and Smyth, R. (2008): “Unit root properties of crude oil spot and futures prices”, Energy Policy, 36, 2591-2600. Perron, P. and Yabu, T. (2009): “Testing for shifts in trend with an integrated or stationary noise component”, Journal of Business and Economics Statistics, 27, 369-396. Perron, P. and Zhu, X. (2005): “Structural breaks with deterministic and stochastic trends”, Journal of Econometrics, 129, 65-119. Pfaffenzeller, S., Newbold, P. and Rayner, A. (2007): “A short note on updating theGrilli and Yang commodity price index”, World Bank Economic Review, 21, 151-163. Pindyck, R.S. (1999): “The long-run evolution of energy prices”, The Energy Journal, 20, 1-28. Plunkert, P.A. (1999): “Aluminum”, in Metals Prices in the United States Through 1998, U.S. Geological Survey, 1-4. Postali, F.A.S. and Picchetti, P. (2006): “Geometric Brownian Motion and structural breaks in oil prices: a quantitative analysis”, Energy Economics, 28, 506-522. Prodan, R. (2008): “Potential pitfalls in determining multiple structural changes with an application to purchasing power parity”, Journal of Business and Economic Statistics, 26, 50-65. Reinhart, C. and Wickham, P. (1994): “Commodity prices: cyclical weakness or secular decline?”, International Monetary Fund Staff Papers 41, 175-213. Sinn, H.W. (2008): “Public policies against global warming: a supply side approach", International Tax and Public Finance, 15, 360-394. Slade, M.E. (1982): “Trends in natural-resource commodity prices: an analysis of the time domain”, Journal of Environmental Economics and Management, 9, 122-137. Slade, M.E. (1988): “The pricing of metals”, Centre for Resource Studies Monograph, Queen´s University, Kingston, OT. Smith, G.R. (1999): “Lead”, in Metals Prices in the United States Through 1998, U.S. Geological Survey, 1-4. Stürmer, M. (2011); “150 years of boom and bust- what drives mineral commodity prices?”, Institute for International Economic Policy, University of Bonn. Xu, X.E. and Fung, H.G. (2005): “Cross-market linkages between U.S. and Japanese precious metals futures trading”, International Financial Markets, Institutions and Money, 15, 107-124. Yang, C., Lin, C. and Kao, Y. (2012): “Exploring stationarity and structural breaks in commodity prices by the panel data model”, Applied Economics Letters, 19, 353-361.