Is There a Single National Lumber Market in the United States?

Runsheng Yin and Jungho Baek

Abstract: This article revisits the question of whether the law of one price (LOP) holds for the United States
lumber markets, with the most disaggregate data and a large number of price combinations for different products,
regions, and species. We also paid close attention to issues related to how we should conduct unit root tests with
a potential structural break, whether we should include intercept and time trend in a co-integration model, and
what lag length should be chosen. After exhaustive investigations, we find overwhelming evidence supporting
the LOP for the entire United States softwood lumber market. We believe that this finding has profound
implications on our market modeling and policy analysis. FOR. SCI. 51(2):155–164.
Key Words: Softwood lumber markets, law of one price, time-series analysis, unit root test with a structural
break, Johansen co-integration test.

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I
S THERE A SINGLE national lumber market in the United
States? The answer to this question pertains to our
knowledge of the behavior of lumber markets and thus
the appropriate way(s) to model and deal with them. Lum-
ber production for housing construction, repairs, and other
purposes constitutes a major manufacturing industry in the
United States. The 1999 domestic production of softwood
lumber alone was close to 35 bbf, valued at about US$12
billion. Meanwhile, the United States imported an addi-
tional 17 bbf from Canada, worth US$6.5 billion (Howard
2001). Therefore, it is crucial to clearly and accurately
understand the behavior of lumber markets.
So far, however, most, if not all, lumber market models
have been predicated on the assumption that there exists a
single national market in the United States (e.g., Robinson
1974, Adams and Haynes 1980, Boyd and Krutilla 1987). In
other words, all the lumber market segments of different
regions, species, grades, and dimensions are treated as
though they are in a long-run equilibrium. This treatment
implies that the law of one price (LOP) holds for those
markets. However, the LOP assumption has not been ade-
quately scrutinized. The objective of this article is to fill this
significant knowledge gap with disaggregated data and im-
proved procedures.
In the literature, whether or not different markets of a
commodity are integrated or segmented is often interpreted
as evidence of whether or not they follow the LOP (Buoni-
giorno and Uusivuori 1992, Hänninen 1998, Abildtrup et al.
1999). Of course, economic analysts rarely insist that all the
price series of the commodity in different markets are
exactly the same; rather, they maintain that, given allow-
ances for price premiums derived from quality differentia-
tion and transport and trading costs, these market segments
tend to behave uniformly in a consistent way over time.
To our knowledge, Uri and Boyd (1990) and Jung and
Doroodian (1994) are the only two studies that have been
done to test the LOP hypothesis for United States softwood
lumber markets [1]. Uri and Boyd (1990) conducted biva-
riate causality tests to detect the geographical extent of
softwood lumber markets. Their evidence of regional mar-
ket integration led them to conclude that there is indeed a
single market for softwood lumber in the United States.
Using the same data set, Jung and Doroodian (1994) sub-
sequently used Johansen’s multivariate co-integration test
procedure to examine the Uri and Boyd (1990) conclusion.
They reported that their results confirmed what Uri and
Boyd had found.
It appears that these two studies have already answered
the question we posed at the beginning; as such, it could be
redundant for us to bring it up once again. However, the
previous two studies used aggregate data—four regional
lumber price series (South, Northwest, North, and Rocky
Mountain) originally compiled by Adams et al. (1988) in
developing their Timber Assessment Market Model. Obvi-
ously, the data compilation already presumed that the
United States softwood lumber markets are integrated not
only in species, grade, and dimension terms, but also at the
regional level. In addition, it removed the fluctuations of
disaggregated individual price series by averaging. There-
fore, although it is more likely to accept the LOP hypothesis
using such a data set, it seems inappropriate to do so, and
the conclusion reached this way could thus be spurious.
Moreover, Jung and Doroodian (1994) might have mis-
interpreted their test results of the LOP for United States
softwood lumber markets. As noted by Abildtrup et al.
(1999), “Jung and Doroodian find a single co-integration
relation in a system involving four different American price
series. Contrary to their claim, the finding of only one

Runsheng Yin, Assistant Professor, Department of Forestry, Michigan State University, 126 Natural Resources Bldg., East Lansing, MI 48824 —Phone: (517)
432-3352; Fax: (517) 432-1143; yinr@msu.edu. Jungho Baek, Research Assistant Professor, Center for Agricultural Policy and Trade Studies, 207C Morrill
Hall, Department of Agribusiness & Applied Economics, North Dakota State University, Fargo, ND 58105-5636 —Phone: (701) 231-7451; Fax: (701)
231-7400; baekjun1@msu.edu.
Acknowledgments: The authors are grateful to the reviewers’ comments and the editors’ assistance for improving the paper. Any remaining errors are their
own.

Manuscript received September 27, 2002, accepted January 13, 2005 Copyright © 2005 by the Society of American Foresters

Forest Science 51(2) 2005 155

stationary relation between [sic] four price series of the
same commodity cannot be accepted as a strong support for
the law of one price because the expected number of lin-
early independent stationary relations is three.” That is, for
the LOP to hold in n markets, there must be n ⫺ 1 co-
integration relationships (Johansen and Juselius 1990). As
such, the Jung and Doroodian finding of only one stationary
relation suggests the presence of three different stochastic
trends in the system, each representing an autonomous
market in itself [2]. If true, this implication is disturbing
because it indicates that (1) models based on the existence
of a single national lumber market are flawed, and (2) the
longtime industry practice of reporting a composite price
index might be problematic.
In sum, the sample data used and the testing procedure
interpreted in the previous works have cast doubts on their
conclusion. Hence, further testing of the LOP hypothesis is
warranted, which is what we intend to do in this article. As
Jung and Doroodian (1994) did, we will use the Johansen
co-integration approach that features multivariate autore-
gression and maximum likelihood estimation. Unlike them,
however, we will consider alternative model specifications
in terms of lag length, intercept, and time trend because the
testing outcome is sensitive to differences in these aspects
(Johansen 1995). In addition, we will incorporate market
structural break into our testing (Maddala and Kim 1998),
which can have a substantive impact on estimated results
but has been largely ignored by early co-integration analy-
ses of forest products markets. Moreover, we will use highly
disaggregated price series for softwood lumber in the
United States, as reported by Random Lengths (1999). It is
hoped that, in combination, these steps will lead to more
robust empirical findings.
After exhaustive investigation, we find overwhelming
evidence supporting the LOP for the United States softwood
lumber markets, implying that these markets are indeed
integrated and efficient. Therefore, we can state that, among
other things, the current strategies to model aggregate lum-
ber markets, to compile composite lumber price indexes,
and to conduct policy assessment at the regional or national
level are justified. The remainder of the article is organized
as follows. First, we briefly discuss the procedures of LOP
and unit root testing in the presence of a structural break.
Next, we present our sample price series. Then, we report
our empirical results. Finally, we make some concluding
remarks.
Methods
As pointed out earlier, the LOP hypothesis is tested by
determining whether there is an equilibrium relationship
between two or more markets in the long run. For instance,
an equilibrium price relationship between two markets can
be represented by the equation,
pit ⫽ a ⫹ bij pjt ⫹ ␧t , (1)
where pit and pjt are prices for market i and j, a and bij are
coefficients to be estimated, and ␧t is the error term at time
156 Forest Science 51(2) 2005
t. The equilibrium relationship between markets i and j can
be discerned by examining bij, with the specific criterion
and method dependent on the LOP version to be tested
(Baffes 1991).
The Johansen co-integration procedure for testing the
LOP involves a rank test and a parameter restriction test.
The rank test, a test of the weak version LOP, is to identify
the number of co-integration vectors, r, using a multivariate
autoregression model. Given a vector yt of n potentially
endogenous variables, it is possible to model yt as an unre-
stricted vector autoregression (VAR) having up to k lags:
yt ⫽ A1 yt⫺1 ⫹ · · · ⫹ Ak yt⫺k ⫹ ut , (2)
where each of the Ai is an (n ⫻ n) matrix of parameters, and
ut is a vector of normally and independently distributed
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error terms. This system is in reduced form with each
variable in yt regressed only on lagged values of itself and
all the other variables [3].
Equation 2 can be reformulated as
⌬yt ⫽ ⌫1 ⌬yt⫺1 ⫹ · · · ⫹ ⌫k⫺1 ⌬yt⫺k⫹1 ⫹ ⌸yt⫺k ⫹ ut ,
(3)
t ⫽ 1, . . . , T
with
⌫i ⫽ ⫺ 共I ⫺ A1 ⫺ · · · ⫺ Ai 兲 i ⫽ 1, . . . , k ⫺ 1
and
⌸ ⫽ ⫺ 共I ⫺ A1 ⫺ · · · ⫺ Ak 兲.
The model specified this way contains information on both
the short-run and long-run adjustments to changes in yt ·
⌸ ⫽ ␣␤⬘, where ␣ represents the speed of adjustment to
equilibrium and ␤ is a matrix of long-run coefficients such
that the term ␤⬘yt⫺k represents r co-integration relationships
(r can be up to n ⫺ 1).
When the number of co-integration vectors, r, has been
determined by the rank test, it is possible to further test the
LOP hypothesis by imposing linear restrictions on the
␤-matrix to find one-to-one relationships between the un-
derlying series (Baffes 1991). This is a test of the strong
version LOP. In this article, we only consider the weak
version, using the rank test for the following reasons. First,
in view of the variations in product quality, and shipment
and trading costs, we believe that the weak version is more
relevant to the United States softwood lumber markets.
Also, given the massive amount of data analyzed, it is
almost impossible to add testing the strong version to this
article as well.
It should be emphasized, though, that because co-
integration analysis applies to nonstationary processes, we
must perform unit root tests to identify whether the sample
price series are stationary first. Although unit root tests
themselves are straightforward to do, it is a challenge to
incorporate potential structural breaks in the price series
into these tests. Recent studies have shown that the usual
augmented Dickey–Fuller (ADF) (Dickey and Fuller 1979)
approach is unable to detect the structural break in a series
because of its implicit assumption that the deterministic
trend is correctly specified (Perron 1988, Banerjee et al.
1992, Maddala and Kim 1998). In other words, if there is a
break in the deterministic trend, then the ADF could falsely
lead to a conclusion that there is a unit root when in fact
there is not, or vice versa. Therefore, if there is any evidence
of a structural break in the series, the ADF procedure for a
unit root test needs to be amended to avoid this problem.
Induced by the spotted owl debate and ensuing federal
harvest reductions in the Pacific Northwest, United States
softwood log and lumber markets witnessed an unprece-
dented structural change in the early 1990s (see Figure 1).
So far, unfortunately, this structural break has received little
formal treatment in economic research. Yin (2002), Sa-
phores et al. (2003), and Wear and Murray (2004) are
perhaps the only exceptions. To carry out unit root tests with
a potential structural change, we adopt the approach devel-
oped by Banerjee, Lumsdaine, and Stock (BLS; 1992). This
approach uses recursive, rolling, trend-shift, and mean-shift
procedures to test for the possibility of a structural break in
a time series (see Appendix). As to how to perform co-
integration analysis of the price series in the presence of a
structural break, we will address this question in the fol-
lowing sections.
Data
Our data for the U.S. softwood lumber markets were
collected from Random Lengths (1999). The monthly lum-
ber price series initially covered the last two decades from
Jan. 1980 to Dec. 1999 (1980:1–1999:12) whenever avail-
able. However, our results of unit root tests showed that
most of the selected price series underwent a permanent
structural change around 1991. As such, the final sample for
co-integration analysis covered the period of 1992:1–1999:12,
containing 96 observations in each series.
The sample characterizes softwood lumber produced
from five major species combinations: Douglas-fir, Fir &
Figure 1. A plot of Douglas-fir log and lumber prices in the Pacific
Northwest.
Larch, Hem-Fir, Spruce-Pine-Fir, and Southern Pine. Ran-
dom Lengths reports lumber prices for four regions: North-
east, North Central, South, and West. The West encom-
passes the coast and the inland, where the main species
combinations are Douglas-fir, Fir & Larch, and Hem-Fir.
The South is subdivided into three zones: the west side,
central, and east side, where Southern Pine is a generic
name for the pine species. Likewise, Spruce-Pine-Fir is the
main species combination for lumber produced/sold in
Northeast and North Central.
Furthermore, lumber can be classified according to dif-
ferent grades and dimensions. For example, lumber pro-
duced from Douglas-fir, Fir & Larch, and Hem-Fir in the
West comprises (1) 2 ⫻ 4 – 8⬘, Stud Grade (hereafter, DF,
FL, HF); (2) 2 ⫻ 4, Std&Btr (DF1, FL1, HF1); (3) 2 ⫻ 4,
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Utility (DF2, FL2, HF2); (4) 2 ⫻ 6, #2&Btr (DF3, FL3,
HF3); and (5) 2 ⫻ 10, #2&Btr (DF4, FL4, HF4). Some of
the main products manufactured from Southern Pine in-
clude: (1) 2 ⫻ 4 – 8⬘, Stud Grade (SP, west side); (2) 2 ⫻ 4,
#2 (SP1, west side); (3) 2 ⫻ 6, #2 (SP2, west side); (4) 2 ⫻
10, #2 (SP3, west side); (5) 2 ⫻ 4, #2 (SP4, central); (6) 2 ⫻
6, #2 (SP5, central); (7) 2 ⫻ 4, #2 (SP6, east side); and (8)
2 ⫻ 6, #2 (SP7, east side). Our sample also includes 13
series for products made from Spruce-Pine-Fir, some of
which are for products delivered to such markets as Boston,
the Great Lakes, and Toronto.
Together, our sample contains 36 lumber price series.
Table 1 summarizes our data, which were transformed log-
arithmically in our analysis. It should be noted that all the
products used in this study are kiln dried. There are so many
other series reported by Random Lengths that it is impos-
sible for us to consider all of them. Of course, we believe
that the 36 selected series have captured most of major
market segments.
Now it can be seen that, because lumber distinguishes in
a number of ways, more disaggregated analysis of market
relationships is both desirable and necessary. It also implies
that, even for analysis based on disaggregated data, it may
not be helpful to lump them together in a grand test of
market relationships. Instead, what we should do is to
conduct multiple tests from different perspectives (grades,
dimensions, species, and regions) with certain selected se-
ries. An added benefit of this multi-step approach is that it
gives us more flexibility in specifying our models
properly— how many lags and whether time trend and con-
stant terms should be included. This situation also raises the
question of whether lumber products are homogenous,
which is what Buonigiorno et al. (1979) were concerned
about. Again, our suggestion is that, rather than jumping to
the conclusion without testing, we should let the analytic
outcome tell us one way or another.
Empirical Analysis
Unit Root and Other Diagnostic Tests
In determining the stationarity of price series with a
potential structural break, we estimated the four BLS
Forest Science 51(2) 2005 157
Table 1. Data description for softwood lumber price series

Species Dimension Category Region (subregion) Acronym

Douglas-fir 2 ⫻ 4–8⬘ Stud grade West (coast) DF
2 ⫻ 4 Std&Btr West (coast) DF1
2 ⫻ 4 Utility West (coast) DF2
2 ⫻ 6 #2&Btr West (coast) DF3
2 ⫻ 10 #2&Btr West (coast) DF4
Fir & Larch 2 ⫻ 4–8⬘ Stud grade West (inland) FL
2 ⫻ 4 Std&Btr West (inland) FL1
2 ⫻ 4 Utility West (inland) FL2
2 ⫻ 6 #2&Btr West (inland) FL3
2 ⫻ 10 #2&Btr West (inland) FL4
Hem-Fir 2 ⫻ 4–8⬘ Stud grade West (coast) HF
2 ⫻ 4 Std&Btr West (coast) HF1
2 ⫻ 4 Utility West (coast) HF2
2 ⫻ 6 #2&Btr West (coast) HF3
⫻

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2 10 #2&Btr West (coast) HF4
Spruce-Pine-Fir 2 ⫻ 4–8⬘ Stud grade North (west) SPF
2 ⫻ 4 Std&Btr North (west) SPF1
2 ⫻ 4 Utility North (west) SPF2
2 ⫻ 6 #2&Btr North (west) SPF3
2 ⫻ 10 #2&Btr North (west) SPF4
2 ⫻ 4–8⬘ Stud grade Northeast (Boston) SPFB
2 ⫻ 4 #1&2 Northeast (Boston) SPFB1
2 ⫻ 6 #1&2 Northeast (Boston) SPFB2
2 ⫻ 4–8⬘ Stud grade North Central (Great Lakes) SPFL
2 ⫻ 4 #1&2 North Central (Great Lakes) SPFL1
2 ⫻ 6 #1&2 North Central (Great Lakes) SPFL2
2 ⫻ 4–8⬘ Stud grade North Central (Toronto) SPFT
2 ⫻ 4 #1&2 North Central (Toronto) SPFT1
Southern Pine 2 ⫻ 4–8⬘ Stud grade South (west side) SP
2 ⫻ 4 #2 South (west side) SP1
2 ⫻ 6 #2 South (west side) SP2
2 ⫻ 10 #2 South (west side) SP3
2 ⫻ 4 #2 South (central) SP4
2 ⫻ 6 #2 South (central) SP5
2 ⫻ 4 #2 South (eastside) SP6
2 ⫻ 6 #2 South (eastside) SP7
Dimension refers to the nominal thickness and width measurements, expressed in inches, of any pieces of lumber. For example, the first number in 2 ⫻
4 represents the thickness (in inches), and the second number represents the width (in inches). For studs, a third number is used to indicate the length (in
inches). Also, lumber is sorted for different use categories and applications to establish a uniform standard among different lumber manufacturers. Std&Btr
refers to standard and better, and #2&Btr refers to grade #2 and better (see Leckey (1998) for more details).

statistics (recursive, rolling, trend-shift, and mean-shift)
with two lags (k ⫽ 2) for the original sample covering
1980:1–1999:12. The lag length was chosen using the
Akaike information criterion. For comparison, we also es-
timated the usual ADF statistics for the series with the same
lag length. As shown in Table 2, there is strong evidence for
rejecting the unit root null after allowing for the possibility
of a structural break. In specifics, the unit root null could not
be rejected for all the series with the usual ADF test. In
contrast, the BLS tests, mostly under a trend-shift regime,
indicated that the unit root null was rejected for 23 of the 35
price series at the 5% and 10% significant levels. Failure to
take account of this structural change could thus lead to
under-rejection of the null hypothesis. Furthermore, by ex-
amining the F statistics, a breakpoint was identified to be
around 1991:12. Therefore, we concluded that most of the
price series experienced a permanent structural change
(slope shift) in 1991:12.
According to our results of the BLS tests, it is thus no
longer appropriate to use the full sample in our co-
integration analysis. Our original sample should be divided
into two subperiods according to the breakpoint, and our
LOP testing should be implemented for the two subperiods
separately. Because the subperiod following the structural
break (1992:1–1999:12) is more recent and thus meaningful
to our understanding of the current market relationships, we
decided to focus our attention on that subperiod. Then, we
repeated the usual ADF tests for the shortened price series.
As shown in Table 3, the unit root null hypothesis was not
rejected for the level series, but was rejected for the first
differences of them at 5% significance level. From these
findings, we inferred that the price series over the period
1992:1–1999:12 are nonstationary and integrated of order 1,
or I(1); therefore, co-integration analysis can be pursued on
them.
To aid our model selection for co-integration analysis,
we also conducted other diagnostic tests for the residuals of
our data with different lag lengths. These tests include serial
correlation, heteroskedasticity, and normality. Table 4 re-
ports our results. Overall, it appears that the model with two

158 Forest Science 51(2) 2005

Table 2. Unit root tests of softwood lumber price series with and without a potential structural break

Trend-shift Mean-shift
Recursive Rolling
Series Sampling period ADF tests Min tDF Min tDF Min tDF Max F Min tDF Max F
DF 80:1–99:12 ⫺2.74 ⫺3.93* ⫺3.93 ⫺4.51** 16.16** ⫺4.45 9.97
DF1 80:1–99:12 ⫺1.14 ⫺3.92* ⫺2.88 ⫺4.13* 8.89 ⫺3.88 7.96
DF2 80:1–99:12 ⫺1.80 ⫺2.91 ⫺3.03 ⫺3.91 8.03 ⫺3.86 7.67
DF3 80:1–99:12 ⫺0.81 ⫺3.59 ⫺3.33 ⫺4.07 8.68 ⫺3.75 7.55
DF4 80:1–99:12 ⫺1.10 ⫺4.07* ⫺4.60* ⫺5.09** 13.33* ⫺4.47 11.23
FL 80:1–99:12 ⫺2.75 ⫺4.06* ⫺4.05 ⫺4.44** ⫺19.90** ⫺4.44 9.91
FL1 80:1–99:12 ⫺1.16 ⫺4.06* ⫺2.60 ⫺3.79 7.54 ⫺3.60 6.76
FL2 80:1–99:12 ⫺1.85 ⫺2.66 ⫺3.01 ⫺3.85 7.64 ⫺3.89 7.59
FL3 80:1–99:12 ⫺0.92 3.50 ⫺3.37 ⫺3.89 7.87 ⫺3.63 6.89
FL4 80:1–99:12 ⫺1.22 ⫺3.81 ⫺5.10** ⫺5.13** 13.34* ⫺4.27 11.27
HF 81:7–99:12 ⫺2.13 ⫺3.49 ⫺3.71 ⫺4.87** 13.95* ⫺4.50 10.32
HF1 81:7–99:12 ⫺1.86 ⫺3.51 ⫺3.07 ⫺4.67** 16.32** ⫺4.36 9.79
HF2 81:7–99:12 ⫺2.20 ⫺3.08 ⫺3.09 ⫺4.40** 19.93** ⫺4.39 11.02

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HF3 81:7–99:12 ⫺1.39 ⫺3.19 ⫺2.94 ⫺4.79** 15.89* ⫺4.42 9.87
HF4 81:7–99:12 ⫺1.45 ⫺4.48** ⫺3.65 ⫺5.76** 16.71** ⫺4.48 15.05
SPF 80:1–99:12 ⫺2.55 ⫺4.11* ⫺3.68 ⫺4.62** 14.69* ⫺4.35 10.28
SPF1 80:1–99:12 ⫺0.99 ⫺3.47 ⫺2.91 ⫺4.44** 1.34 ⫺4.20 9.01
SPF2 80:1–99:12 ⫺2.40 ⫺2.62 ⫺2.78 ⫺3.42 6.02 ⫺3.52 6.23
SPF3 80:1–99:12 ⫺1.26 ⫺4.16* ⫺3.80 ⫺4.80** 15.95** ⫺4.46 11.61
SPF4 80:1–99:12 ⫺1.16 ⫺4.20** ⫺3.02 ⫺4.44** 16.98** ⫺4.37 9.74
SPFB 80:1–99:12 ⫺2.69 ⫺3.76 ⫺3.01 ⫺4.95** 17.24** ⫺4.30 12.12
SPFB1 80:1–99:12 ⫺1.04 ⫺3.58 ⫺2.96 ⫺4.53** 15.53* ⫺4.50 10.40
SPFB2 82:1–99:12 ⫺2.68 ⫺4.16* ⫺4.06 ⫺4.77** 18.42** ⫺4.14 11.73
SPFL 82:1–99:12 ⫺2.41 ⫺3.41 ⫺3.77 ⫺4.87** 13.87* ⫺4.47 10.90
SPFL1 80:1–99:12 ⫺1.01 ⫺3.54 ⫺3.18 ⫺4.69** 17.24** ⫺4.18 11.10
SPFL2 87:7–99:12 ⫺1.79 ⫺3.80 ⫺4.25 ⫺4.76** 13.66* ⫺4.50 10.42
SPFT 87:7–99:12 ⫺1.25 ⫺3.39 ⫺3.60 ⫺3.79 7.19 ⫺3.39 5.88
SP 80:1–99:12 ⫺2.63 ⫺4.99** ⫺4.79* ⫺5.07** 17.86** ⫺3.99 8.13
SP1 80:1–99:12 ⫺2.53 ⫺3.47 ⫺3.71 ⫺3.87 7.93 ⫺3.92 7.86
SP2 80:1–99:12 ⫺2.48 ⫺3.83 ⫺3.86 ⫺4.05 8.28 ⫺4.16 8.72
SP3 80:1–99:12 ⫺1.37 ⫺4.76** ⫺3.48 ⫺5.76** 16.66** ⫺3.75 16.61
SP4 87:7–99:12 ⫺2.10 ⫺4.42** ⫺3.35 ⫺4.06 8.28 ⫺3.54 6.73
SP5 87:7–99:12 ⫺2.45 ⫺4.20** ⫺4.11 ⫺4.40* 19.71** ⫺3.93 8.28
SP6 80:1–99:12 ⫺2.65 ⫺3.08 ⫺3.33 ⫺3.95 8.21 ⫺3.99 8.15
SP7 80:1–99:12 ⫺2.66 ⫺4.03* ⫺3.85 ⫺2.95 4.45 ⫺4.19 8.83
Other than the usual augmented Dickey–Fuller procedure, we incorporate a potential structural break into the unit root tests; see Table 1 for definitions of
the price series; SPFT1 was excluded because of unavailability of data before 1991; the 5% and 10% critical value for the ADF including a constant and
a time trend are ⫺3.43 and ⫺3.13; the 5% and 10% critical values for Min tDF (sample size T ⫽ 250) are ⫺4.18 and ⫺3.91 if recursive tests, ⫺4.85 and
⫺4.59 if rolling tests, ⫺4.39 and ⫺4.12 if trend-shift tests, ⫺4.80 and ⫺4.51 if mean-shift tests; The 5% and 10% critical values for Max F (sample size
T ⫽ 250) are 15.94 and 13.32 if trend-shift tests and 19.01 and 16.72 if mean-shift tests. Critical values are from Tables 1 and 2 in Banerjee et al. (1992);
the lag length (k ⫽ 2) was chosen on the basis of the Akaike information criterion.
* and ** denote rejection of null hypothesis of a unit root at 10% and 5% significance level.

lags can describe the data sufficiently well. In our error
autocorrelation test, the null hypothesis of no serial corre-
lation was accepted at the 5% significance level. Normality
of the residuals was tested by means of the Doornik–Hansen
(1994) method and accepted for most series, with the ex-
ceptions of DF2, HF1, HF2, and SPF4. For HF1 and SPF4,
non-normality was less of a problem because their P-values
were very close to the 5% significant level. For DF2 and
HF2, we made corrections to the outliers in 1999:7– 8 using
intervention dummies to eliminate their non-normality,
which might have been caused by some localized events. In
our heteroskedasticity tests, the null of no heteroskedasticity
was accepted at the 5% significant level for all the series.
Furthermore, the specification tests indicated that, al-
though a time trend was necessary, seasonal dummies
were not.
Johansen Co-Integration Test
Our implementation of the co-integration tests proceeded
as follows. We tested (1) whether the LOP holds for differ-
ent products of the same species in the same regions, (2)
whether the LOP holds for the four large geographic regions
(West, Northeast, North Central, and South), (3) whether
the LOP holds for different species combinations across
regions (Douglas-fir, Fir & Larch, Hem-Fir, Spruce-Pine-
Fir, and Southern Pine), and (4) whether the LOP holds for
more randomly combined series.
In testing whether the LOP holds for different products
of the same species in the same regions, we selected DF1,
DF2, DF3, and DF4 for Douglas-fir. Similar selections were
made for Fir & Larch, Hem-Fir, and Spruce-Pine-Fir. Be-
cause Southern Pine is classified differently, we chose two
combinations (SP1, SP2, SP3, and SP4; and SP1, SP2, SP3,

Forest Science 51(2) 2005 159

Table 3. Augmented Dickey–Fuller unit root tests of softwood lumber Table 4. Summary of diagnostic tests for residuals of softwood lum-
price series (1992:1–1999:12) ber price series (1992:1–1999:12)

Series Level First difference Lags Serial

correlation Normality Heteroskedasticity
DF ⫺2.75 ⫺5.48* 7
Prices FAR(2, 82) ␹2(2) FARCH(6, 72)
DF1 ⫺2.66 ⫺3.90* 7
DF2 ⫺2.89 ⫺4.01* 5 ⌬DF 1.32 关0.26兴 1.47 关0.48兴 1.17 关0.33兴
DF3 ⫺2.78 ⫺5.23* 3 ⌬DF1 1.69 关0.14兴 0.04 关0.98兴 0.66 关0.68兴
DF4 ⫺2.88 ⫺6.27* 3 ⌬DF2 1.21 关0.31兴 13.03 关0.00兴** 1.09 关0.38兴
FL ⫺2.71 ⫺5.23* 7 ⌬DF3 0.70 关0.65兴 2.50 关0.29兴 0.60 关0.73兴
FL1 ⫺2.77 ⫺4.32* 7 ⌬DF4 0.43 关0.86兴 0.11 关0.33兴 0.47 关0.83兴
FL2 ⫺2.47 ⫺4.45* 4 ⌬FL 0.96 关0.46兴 0.43 关0.81兴 0.62 关0.71兴
FL3 ⫺2.79 ⫺4.60* 4 ⌬FL1 0.73 关0.63兴 3.33 关0.19兴 0.83 关0.55兴
FL4 ⫺2.74 ⫺5.08* 4 ⌬FL2 0.78 关0.59兴 3.79 关0.15兴 0.28 关0.95兴
HF ⫺2.76 ⫺5.18* 7 ⌬FL3 0.85 关0.54兴 2.11 关0.35兴 1.02 关0.42兴
HF1 ⫺2.69 ⫺5.35* 4 ⌬FL4 0.68 关0.66兴 1.30 关0.52兴 0.86 关0.53兴
HF2 ⫺2.37 ⫺4.20* 7 ⌬HF 1.60 关0.16兴 2.12 关0.35兴 0.76 关0.60兴
⫺2.60 ⫺5.30* ⌬HF1 1.55 关0.17兴 6.35 关0.04兴* 1.19 关0.32兴

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HF3 4
HF4 ⫺2.60 ⫺6.05* 4 ⌬HF2 2.05 关0.07兴 18.17 关0.00兴** 0.63 关0.70兴
SPF ⫺2.47 ⫺5.22* 7 ⌬HF3 1.42 关0.22兴 2.02 关0.36兴 0.96 关0.46兴
SPF1 ⫺2.36 ⫺5.71* 4 ⌬HF4 1.52 关0.18兴 2.39 关0.30兴 1.49 关0.19兴
SPF2 ⫺2.24 ⫺4.69* 4 ⌬SPF 0.68 关0.67兴 1.04 关0.59兴 0.26 关0.95兴
SPF3 ⫺2.66 ⫺5.95* 4 ⌬SPF1 1.06 关0.40兴 0.62 关0.73兴 0.56 关0.76兴
SPF4 ⫺2.51 ⫺5.90* 4 ⌬SPF2 0.71 关0.65兴 0.56 关0.75兴 0.75 关0.62兴
SPFB ⫺2.70 ⫺5.97* 4 ⌬SPF3 0.84 关0.54兴 1.18 关0.55兴 0.55 关0.77兴
SPFB1 ⫺2.36 ⫺5.48* 4 ⌬SPF4 2.17 关0.06兴 6.63 关0.04兴* 0.36 关0.90兴
SPFB2 ⫺2.56 ⫺5.90* 4 ⌬SPFB 0.67 关0.67兴 1.16 关0.56兴 0.13 关0.99兴
SPFL ⫺2.55 ⫺5.88* 4 ⌬SPFB1 0.53 关0.78兴 0.28 关0.87兴 0.50 关0.80兴
SPFL1 ⫺2.35 ⫺5.55* 4 ⌬SPFB2 0.81 关0.53兴 0.39 关0.82兴 0.27 关0.95兴
SPFL2 ⫺2.45 ⫺5.68* 4 ⌬SPFL 0.72 关0.63兴 1.61 关0.45兴 0.21 关0.97兴
SPFT ⫺2.61 ⫺5.73* 4 ⌬SPFL1 0.70 关0.65兴 0.24 关0.89兴 0.43 关0.86兴
SPFT1 ⫺2.36 ⫺5.17* 4 ⌬SPFL2 0.73 关0.63兴 0.48 关0.79兴 0.34 关0.91兴
SP ⫺2.82 ⫺5.00* 8 ⌬SPFT 0.91 关0.49兴 0.19 关0.91兴 0.56 关0.76兴
SP1 ⫺2.72 ⫺5.34* 6 ⌬SPFT1 0.86 关0.53兴 0.34 关0.84兴 0.67 关0.68兴
SP2 ⫺2.82 ⫺5.10* 7 ⌬SP 1.33 关0.26兴 0.29 关0.87兴 1.57 关0.17兴
SP3 ⫺2.41 ⫺5.20* 6 ⌬SP1 0.56 关0.76兴 2.35 关0.31兴 1.14 关0.35兴
SP4 ⫺2.58 ⫺4.70* 7 ⌬SP2 1.58 关0.17兴 3.49 关0.17兴 0.43 关0.86兴
SP5 ⫺2.74 ⫺5.08* 7 ⌬SP3 1.07 关0.31兴 0.05 关0.79兴 1.35 关0.25兴
SP6 ⫺2.66 ⫺5.46* 6 ⌬SP4 0.85 关0.53兴 1.66 关0.44兴 1.16 关0.34兴
SP7 ⫺2.70 ⫺4.90* 7 ⌬SP5 1.88 关0.10兴 2.40 关0.30兴 0.44 关0.85兴
⌬SP6 0.76 关0.61兴 1.14 关0.56兴 1.20 关0.32兴
Critical value including a constant and a time trend is ⫺3.46 at 5%
significance level; see Table 1 for definitions of the price series.
⌬SP7 1.99 关0.08兴 4.83 关0.10兴 0.36 关0.90兴
* Denotes rejection of null hypothesis of a unit root at 5% significance See Table 1 for definitions of the price series; ⌬ denotes the first
level. differences of the price series; the tabled results were based on a lag
length of two, which was chosen as the best alternative to describe the
data. Serial correlation of the residuals was examined using the F-form of
the Lagrange–Multiplier (LM) test, which is valid for systems with
and SP6) to determine the co-integration rank of the system. lagged independent variables; heteroskedasticity was tested using the
Table 5 shows that, in five of the six cases, the co- F-form of the LM test. Normality of the residuals was tested with the
integration rank is three (r ⫽ 3), at the P-value of 5%. Doornik–Hansen test (Doornik and Hansen 1994).
* and ** denote rejection of the hypothesis at the 5% and 1% significance
Moreover, the test statistic of the third co-integrating vector level.
for the Hem-Fir series was quite close to the 5% level. So,
we accepted the hypothesis that the co-integration ranks are
three and declared that all of the four price series for each ings of different species, such as DF1, FL1, HF1, SPF1, and
species are integrated. SP1 (case 1); DF2, FL2, HF2, SPFL1, and SP2 (case 5). Our
In testing whether the LOP holds for the four large results in Table 7 show that about 88% of the 216 groupings
geographic regions, we used price series for 2 ⫻ 4 and 2 ⫻ have a co-integration rank of four.
6 because both of them are major dimension lumber prod- Then, we further expanded our tests by covering more
ucts. We considered all the possible groupings of different randomly combined series, such as DF1, FL1, HF1, SPFB1,
species in the four regions, such as DF1, SPFB1, SPFL1, SPFL1, and SP3 (case 1); and DF3, FL3, HF3, SPFB1,
and SP1 (case 1); and FL1, SPFB1, SPFL1, and SP1 (case SPFL1, and SP1 (case 5). Once again, our results demon-
5). Again, our results indicated that about 90% of the 126 strate that 92% of the 216 groupings have a co-integration
groupings have a co-integration rank of three. Table 6 is a ank of five (see Tables 8). With all the accumulated
partial summary of our results. evidence suggesting that the LOP holds for most of the
In testing whether the LOP holds for the five different United States lumber market segments, we completed our
species across regions, we also examined all possible group- analysis.

160 Forest Science 51(2) 2005

Table 5. A summary of Johansen co-integration tests of price series for different lumber products of the same species

Null Trace 5% Critical Null Trace 5% Critical

hypothesis E-value statistics value hypothesis E-value statistics value
Case 1: DF1, DF2, DF3, DF4 Lag length: 2 Case 2: FL1, FL2, FL3, FL4 Lag length: 2
H0: r ⫽ 0 0.50 130.37* 62.99 H0: r ⫽ 0 0.43 111.53* 62.99
H0: r ⱕ 1 0.30 64.66* 42.44 H0: r ⱕ 1 0.27 56.77* 42.44
H0: r ⱕ 2 0.22 31.09* 25.32 H0: r ⱕ 2 0.19 26.53* 25.32
H0: r ⱕ 3 0.08 7.79 12.25 H0: r ⱕ 3 0.07 6.84 12.25
Case 3: HF1, HF2, HF3, HF4 Lag length: 2 Case 4: SPF1, SPF2 SPF3, SPF4 Lag length: 2
H0: r ⫽ 0 0.37 91.84* 62.99 H0: r ⫽ 0 0.30 84.90* 62.99
H0: r ⱕ 1 0.21 47.28* 42.44 H0: r ⱕ 1 0.22 50.00* 42.44
H0: r ⱕ 2 0.14 25.34* 25.32 H0: r ⱕ 2 0.16 26.29* 25.32
H0: r ⱕ 3 0.09 9.78 12.25 H0: r ⱕ 3 0.09 9.53 12.25
Case 5: SP1, SP2, SP3, SP4 Lag length: 2 Case 6: SP1, SP2, SP3, SP6 Lag length: 2
H0: r ⫽ 0 0.44 124.36* 62.99 H0: r ⫽ 0 0.45 121.80* 62.99
H0: r ⱕ 1 0.30 68.63* 42.44 H0: r ⱕ 1 0.35 66.12* 42.44
H0: r ⱕ 2 H0: r ⱕ 2

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0.22 34.40* 25.32 0.16 26.24* 25.32
H0: r ⱕ 3 0.10 10.87 12.25 H0: r ⱕ 3 0.10 10.13 12.25
DF1 represents DF price series of 2 ⫻ 4, Std&Btr, other price series are similarly denoted; E-value represents eigenvalue.
* Denotes rejection of the hypothesis at the 5% significance level.

Table 6. A partial summary of Johansen co-integration tests of price series for four large geographic regions of lumber manufacturing

Null Trace 5% Critical Null Trace 5% Critical

hypothesis E-value statistics value hypothesis E-value statistics value
Case1: DF1, SPFB1, SPFL1, SP1 Lag interval: 2 Case 2: DF1, SPFB2, SPFL1, SP1 Lag interval: 2
H0: r ⫽ 0 0.34 91.31* 62.99 H0: r ⫽ 0 0.33 90.63* 62.99
H0: r ⱕ 1 0.23 51.85* 42.44 H0: r ⱕ 1 0.22 52.84* 42.44
H0: r ⱕ 2 0.17 27.04* 25.32 H0: r ⱕ 2 0.19 28.74* 25.32
H0: r ⱕ 3 0.09 9.28 12.25 H0: r ⱕ 3 0.09 8.96 12.25
Case 3: DF2, SPFB2, SPFL2, SP6 Lag interval: 2 Case 4: DF3, SPFB1, SPFL2, SP2 Lag interval: 2
H0: r ⫽ 0 0.35 99.86* 62.99 H0: r ⫽ 0 0.27 78.50* 62.99
H0: r ⱕ 1 0.27 58.56* 42.44 H0: r ⱕ 1 0.20 48.29* 42.44
H0: r ⱕ 2 0.18 28.54* 25.32 H0: r ⱕ 2 0.17 26.97* 25.32
H0: r ⱕ 3 0.09 9.11 12.25 H0: r ⱕ 3 0.09 9.17 12.25
Case 5: FL1, SPFB1, SPFL1, SP1 Lag interval: 2 Case 6: FL2, SPFB1, SPFL1, SP4 Lag interval: 2
H0: r ⫽ 0 0.34 91.19* 62.99 H0: r ⫽ 0 0.27 81.10* 62.99
H0: r ⱕ 1 0.22 50.70* 42.44 H0: r ⱕ 1 0.22 50.24* 42.44
H0: r ⱕ 2 0.16 26.90* 25.32 H0: r ⱕ 2 0.17 26.55* 25.32
H0: r ⱕ 3 0.09 9.71 12.25 H0: r ⱕ 3 0.09 8.97 12.25
Case 7: FL3, SPF3, SPFB2, SP5 Lag interval: 2 Case 8: HF1, SPFB2, SPFL2, SP1 Lag interval: 2
H0: r ⫽ 0 0.27 80.27* 62.99 H0: r ⫽ 0 0.32 93.60* 62.99
H0: r ⱕ 1 0.22 49.49* 42.44 H0: r ⱕ 1 0.25 56.85* 42.44
H0: r ⱕ 2 0.16 26.18* 25.32 H0: r ⱕ 2 0.18 29.36* 25.32
H0: r ⱕ 3 0.09 8.89 12.25 H0: r ⱕ 3 0.09 9.96 12.25
Case 9: HF2, SPFB2, SPFL2, SP6 Lag interval: 2 Case 10: HF3, SPFB1, SPFL2, SP3 Lag interval: 2
H0: r ⫽ 0 0.44 114.86* 62.99 H0: r ⫽ 0 0.27 81.08* 62.99
H0: r ⱕ 1 0.26 59.53* 42.44 H0: r ⱕ 1 0.21 51.41* 42.44
H0: r ⱕ 2 0.20 30.49* 25.32 H0: r ⱕ 2 0.19 28.84* 25.32
H0: r ⱕ 3 0.09 8.83 12.25 H0: r ⱕ 3 0.09 8.46 12.25
DF1 represents DF price series of 2 ⫻ 4, Std&Btr, other price series are similarly denoted; E-value represents eigenvalue; to save space, other results were
not listed.
* Denotes rejection of the hypothesis at the 5% significance level.

Closing Remarks potential structural break, whether we should include inter-

In this article we revisited one of the important questions
in lumber market analysis: “Is there a single national lumber
market in the United States?” To address this question
adequately, we used the most disaggregate data available
and attempted a large number of price combinations for
different products, regions, and species in our co-integration
analysis. Furthermore, we paid close attention to issues
related to how we should conduct unit root tests with a
cept and time trend in a co-integration model, what lag
length should be chosen, and how we should interpret the
estimated results. It was expected that these major efforts
would lend confidence in the robustness and reliability of
our findings. In the end, our answer is an overwhelming
Yes. That is, the LOP holds for most, if not all, softwood
lumber market segments in the United States.
Because of the large number of lumber price series
contained in Random Lengths and their multiple facets

Forest Science 51(2) 2005 161

Table 7. A partial summary of Johansen co-integration tests of price series for five different lumber species

5% 5%
Null Trace Critical Null Trace Critical
hypothesis E-value statistics value hypothesis E-value statistics value
Case 1: DF1, FL1, HF1, SPF1, SP3 Lag interval: 2 Case 2: DF1, FL1, HF1, SPF3, SP1 Lag interval: 2
H0: r ⫽ 0 0.39 134.98* 87.31 H0: r ⫽ 0 0.38 151.07* 87.31
H0: r ⱕ 1 0.31 88.24* 62.99 H0: r ⱕ 1 0.33 105.71* 62.99
H0: r ⱕ 2 0.24 52.81* 42.44 H0: r ⱕ 2 0.29 67.51* 42.44
H0: r ⱕ 3 0.17 26.78* 25.32 H0: r ⱕ 3 0.24 34.08* 25.32
H0: r ⱕ 4 0.09 8.96 12.25 H0: r ⱕ 4 0.08 8.11 12.25
Case 3: DF2, FL1, HF1, SPF1, SP3 Lag interval: 2 Case 4: DF2, FL3, HF3, SPF3, SP1 Lag interval: 2
H0: r ⫽ 0 0.35 124.45* 87.31 H0: r ⫽ 0 0.40 149.79* 87.31
H0: r ⱕ 1 0.30 83.29* 62.99 H0: r ⱕ 1 0.35 100.66* 62.99
H0: r ⱕ 2 0.20 48.82* 42.44 H0: r ⱕ 2 0.28 59.22* 42.44
H0: r ⱕ 3 0.18 27.44* 25.32 H0: r ⱕ 3 0.18 27.40* 25.32
H0: r ⱕ 4 0.08 8.21 12.25 H0: r ⱕ 4 0.08 7.88 12.25

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Case 5: DF3, FL3, HF2, SPFL1, SP1 Lag interval: 2 Case 6: DF1, FL3, HF3, SPFT, SP1 Lag interval: 2
H0: r ⫽ 0 0.42 143.20* 87.31 H0: r ⫽ 0 0.48 153.17* 87.31
H0: r ⱕ 1 0.31 90.51* 62.99 H0: r ⱕ 1 0.32 89.77* 62.99
H0: r ⱕ 2 0.24 55.10* 42.44 H0: r ⱕ 2 0.25 53.59* 42.44
H0: r ⱕ 3 0.17 28.32* 25.32 H0: r ⱕ 3 0.16 25.79* 25.32
H0: r ⱕ 4 0.10 10.25 12.25 H0: r ⱕ 4 0.09 8.75 12.25
Case 7: DF2, FL1, HF2, SPFT, SP3 Lag interval: 2 Case 8: DF3, FL3, HF2, SPFT, SP3 Lag interval: 2
H0: r ⫽ 0 0.36 117.76* 87.31 H0: r ⫽ 0 0.41 128.34* 87.31
H0: r ⱕ 1 0.25 75.36* 62.99 H0: r ⱕ 1 0.26 78.32* 62.99
H0: r ⱕ 2 0.21 48.26* 42.44 H0: r ⱕ 2 0.19 49.71* 42.44
H0: r ⱕ 3 0.17 26.28* 25.32 H0: r ⱕ 3 0.16 29.24* 25.32
H0: r ⱕ 4 0.09 8.81 12.25 H0: r ⱕ 4 0.12 8.58 12.25
DF1 represents DF price series of 2 ⫻ 4, Std&Btr, other price series are similarly denoted; E-value represents eigenvalue; to save space, other results were
not listed.
* Denotes rejection of the hypothesis at the 5% significance level.

(species, grades, dimensions, and regions), it was impracti-
cal for our LOP testing to take up all the possible combi-
nations of the existing price series. Our approach was to
selectively cover price series for those major market seg-
ments. Also, as a result of our finding of a structural shift of
lumber markets around 1991:12, our co-integration analysis
concentrated on the period of 1992:1–1999:12. To some,
this period would seem to be a bit short; our findings should
thus be viewed with caution. However, our use of monthly,
instead of quarterly or yearly, data might have made it more
difficult for the underlying markets to be found integrated
statistically. Combined with our discovery of the structural
break, this should somehow mitigate our concern with the
relatively short period of data coverage and strengthen the
credibility of our findings.
The existence of an integrated, national lumber market in
the United States has important implications for economet-
ric models of softwood lumber. First, it seems safe for us to
treat different lumber products as a homogenous commod-
ity. In addition, as Uri and Boyd (1990) elaborated, if
lumber prices drift in a similar fashion in the long term, the
ratio of these prices, all other things being equal, will
remain constant. From these inferences, we can further draw
a few statements regarding the lumber markets. First, it is
reasonable to report and use the composite lumber price
index as compiled by Random Lengths. Second, when ex-
amining the United States lumber market, analysts need to
incorporate the co-integration relationships; otherwise, the
econometric models could give rise to biased estimation.
Third, researchers should be aware of the simultaneity of
price series, which, if not dealt with, could result in endo-
geneity problems in a market analysis.
Another important implication is that any policy decision
made by local or federal governments directed at specific
regions has impacts on the overall lumber market. That is,
given the nature of a national market for softwood lumber,
policy schemes cannot be localized (Uri and Boyd 1990). In
this respect, the nationwide ripple effect from federal har-
vest reductions in the Northwest in the early 1990s is a good
example. Furthermore, government policies implemented
by overlooking a national market could lead to undesirable
outcomes such as inefficient resource allocations and wel-
fare losses.
A related question is: Is the whole softwood lumber
market in North America, including both the United States
and Canada, integrated? Given the significance of the bilat-
eral lumber trade, the answer to this question is obviously
interesting. Although some preliminary evidence suggests
that the United States and Canada may indeed be integrated
to form the North American lumber market (Yin and Baek,
submitted for publication), it goes beyond the scope of this
article to provide a definite answer to it.
Finally, it should be pointed out that, although we con-
jectured that more aggregated price data would lead to a
greater likelihood to accept the LOP hypothesis, we did not
directly examine the validity of this conjecture in this
article. In addition, we did not consider the relationship

162 Forest Science 51(2) 2005

Table 8. A partial summary of Johansen co-integration tests of more randomly selected price series

5% 5%
Null Trace Critical Null Trace Critical
hypothesis E-value statistics value hypothesis E-value statistics value
Case 1: DF1, FL1, HF1, SPFB1, SPFL1, SP3 Lag interval: 2 Case 2: DF1, FL1, HF2, SPFB1, SPFL1, SP3 Lag interval: 2
H0: r ⫽ 0 0.43 181.73* 114.90 H0: r ⫽ 0 0.49 184.55* 114.90
H0: r ⱕ 1 0.38 127.57* 87.31 H0: r ⱕ 1 0.34 119.73* 87.31
H0: r ⱕ 2 0.27 82.12* 62.99 H0: r ⱕ 2 0.29 80.24* 62.99
H0: r ⱕ 3 0.22 51.77* 42.44 H0: r ⱕ 3 0.20 47.54* 42.44
H0: r ⱕ 4 0.17 27.33* 25.32 H0: r ⱕ 4 0.16 25.97* 25.32
H0: r ⱕ 5 0.09 8.94 12.25 H0: r ⱕ 5 0.09 9.16 12.25
Case 3: DF2, FL3, HF2, SPFB1, SPFL2, SP3 Lag interval: 2 Case 4: DF2, FL1, HF3, SPFB2, SPFL2, SP1 Lag interval: 2
H0: r ⫽ 0 0.38 158.32* 114.90 H0: r ⫽ 0 0.51 196.91* 114.90
H0: r ⱕ 1 0.33 112.83* 87.31 H0: r ⱕ 1 0.38 127.79* 87.31
H0: r ⱕ 2 0.24 74.63* 62.99 H0: r ⱕ 2 0.32 81.58* 62.99
H0: r ⱕ 3 0.21 48.28* 42.44 H0: r ⱕ 3 0.18 44.42* 42.44
H0: r ⱕ 4 H0: r ⱕ 4

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0.17 25.83* 25.32 0.17 26.08* 25.32
H0: r ⱕ 5 0.08 7.88 12.25 H0: r ⱕ 5 0.08 8.15 12.25
Case 5: DF3, FL3, HF3, SPFB1, SPFL1, SP1 Lag interval: 2 Case 6: DF3, FL3, HF1, SPFB2, SPFL1, SP3 Lag interval: 2
H0: r ⫽ 0 0.49 203.90* 114.90 H0: r ⫽ 0 0.53 197.23* 114.90
H0: r ⱕ 1 0.46 139.66* 87.31 H0: r ⱕ 1 0.42 124.67* 87.31
H0: r ⱕ 2 0.31 81.06* 62.99 H0: r ⱕ 2 0.25 73.08* 62.99
H0: r ⱕ 3 0.19 46.20* 42.44 H0: r ⱕ 3 0.18 46.03* 42.44
H0: r ⱕ 4 0.15 26.25* 25.32 H0: r ⱕ 4 0.17 26.74* 25.32
H0: r ⱕ 5 0.10 10.2 12.25 H0: r ⱕ 5 0.09 8.64 12.25
Case 5: DF1, FL1, HF1, SPFB2, SPFT, SP3 Lag interval: 2 Case 5: DF3, FL3, HF3, SPFB2, SPFT, SP1 Lag interval: 2
H0: r ⫽ 0 0.44 168.31* 114.90 H0: r ⫽ 0 0.52 194.24* 114.90
H0: r ⱕ 1 0.32 113.18* 87.31 H0: r ⱕ 1 0.36 123.57* 87.31
H0: r ⱕ 2 0.28 75.77* 62.99 H0: r ⱕ 2 0.28 80.79* 62.99
H0: r ⱕ 3 0.18 44.18* 42.44 H0: r ⱕ 3 0.20 49.41* 42.44
H0: r ⱕ 4 0.15 25.72* 25.32 H0: r ⱕ 4 0.16 27.68* 25.32
H0: r ⱕ 5 0.09 9.68 12.25 H0: r ⱕ 5 0.10 10.53 12.25
DF1 represents DF price series of 2 ⫻ 4, Std&Btr, other price series are similarly denoted; E-value represents eigenvalue; to save space, other results were
not listed.
* Denotes rejection of the hypothesis at the 5% significance level.

between spot and futures markets of softwood lumber prod-
ucts. Does the integration of lumber markets have to do with
the existence of a futures market? How can we predict the
price movement of the spot market with information from
the futures markets? All these issues should be addressed in
future research.
Endnotes
[1] Interested readers can refer to Hänninen (1998), Thorsen (1998),
Thorsen et al. (1999), Toppinen and Toivonen (1998), Nagubadi et al.
(2001), and Yin et al. (2002) for tests of the LOP for various
roundwood markets.
[2] Hänninen (1998) also made similar comments on this problem.
[3] Notice that deterministic terms, such as intercept and linear trend, can
play a crucial role in determining the asymptotic distribution of an
estimator. As such, appropriate formulation of the model is important
to ensure that the co-integration rank tests are not too dependent on
“nuisance parameters” related to the deterministic terms (Doornik and
Hendry 2001).
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Appendix: Unit Root Tests in the Presence of
a Structural Change—The BLS Method
Banerjee et al. (1992) developed a method to test for a
possible structural break in a time series. They used recur-
sive, rolling, and sequential procedures to formulate the
asymptotic distributions for the test statistics and tabulated
the critical values for these statistics.
Recursive statistics are obtained using subsamples t ⫽ 1,
. . . , k for k ⫽ k0,...,T, where k0 is a start-up value and T is
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the size of the full sample. That is, the recursive statistics
are computed for subsamples that start with the first sub-
sample ranging from 1 to k0 with k0 ⫽ 0.25T, and sequen-
tially increase subsample to cover the full sample. The usual
ADF model is estimated for each subsample, and then the
minimum statistics are chosen and compared to the critical
values provided in Table 1 of Banerjee et al. (1992) to test
the null of a unit root.
Similarly, rolling statistics are computed using sub-
samples that are a constant fraction ␦0 of the full sample,
rolling through the sample. The first subsample covers 1 to
k with k ⫽ 0.3T, the second subsample covers 2 to k ⫽ 0.3T
⫹ 1, and so on. Again, the estimated statistics are compared
to the critical values in Table 1 of Banerjee et al. (1992).
The sequential statistics are computed using the full
sample, with the following adaptation of the ADF model:
⌬yt ⫽ ⌽yt⫺1 ⫹ ⌽1 ⌬yt⫺1 ⫹ · · · ⫹ ⌽p⫺1 ⌬yt⫺p⫹1 ⫹ ␥Dt ⫹ ut ,
(4)
where Dt captures the possibility of a shift or jump in the
trend at period t. Banerjee et al. (1992) considered two
cases—shift in trend (slope change) and shift in mean value
(intercept change):
Case A: shift in trend
再
t for t ⬎ k
Dt ⫽ 0 for t ⱕ k,
Case B: shift in mean
再
1 for t ⬎ k
Dt ⫽ 0 for t ⱕ k.
The unknown date of the break or shift is assumed to occur
at k, which is searched out between 0.15T and T ⫺ 0.15T.
Minimum statistics for the trend- and/or mean-shift models
are then compared to the critical values in Table 2 of
Banerjee et al. (1992). In addition, F-statistics is used to test
the null H0: ⌽ ⫽ ␥ ⫽ 0 in the trend-shift and mean-shift
models, and then the maximum values of F-statistics are
compared to the critical values in Table 2 of Banerjee et al.
(1992).