Forecasting Long-run Coal Price in China A Shifting strongTrendstrong.pdfVIP

Forecasting Long-run Coal Price in China: A Shifting Trend Time Series Approach † ∗ Boqiang Lin, Baomin Dong and Xuefeng Li Abstract. The paper studies the behavior of mid- to long-run real energy prices, especially coal price in China. The problem is of great importance because the coal takes 70% share in China’s energy mix and China is the world’s second largest carbon emitter. An accurate forecast in coal price is crucial in predicting China’s future energy consumption mix as well as private sector’s energy-type-related investment decisions. In estimation and forecasting, the shifting trend time series model suggested by Pindyck’s (1999) is used to capture the technological progress etc. that are unobservable to the econometrician. It is found that the shifting trend model with continuous and random changes in price level and trend outperforms plain vanilla ARIMA models. It is argued that the model postulated by Pindyck is robust even in a transition economy where energy prices are subject to relatively rigid regulatory control. Out-of-sample forecasts are provided. Keywords: Shifting Trend, Energy Price, Coal JEL Classification Numbers: Q30, Q40, C53 1. Introduction It has been recognized that fluctuations in energy prices have important and lasting effects on the economies of industrialized countries (Hamilton (2003)). From a microeconomic or managerial 1 p