The empirical relevance of hotelling's model for natural resources

This paper reports the results of an evaluation of the performance of arbitrage models for explaining the price movements for exhaustible natural resources. This appraisal was based on the ex post forecasting performance for eleven years outside the sample period. Data for twelve minerals over the period 1900 to 1973 provided the basis of study. Two features distinguished the alternative descriptions of arbitrage in these resource markets. They are: the description of the process for each natural resource's expected rate of price appreciation, and the measure of the expected rate of return for alternative assets. Overall, the results indicate that the Heal-Barrow (1980) specification was consistently among the 'best' models for the twelve minerals studies. It was not, however, uniformly superior to naive models for forecasting price movements.