A multivariate cointegration test of the law of one price for Canadian softwood lumber markets

The law of one price (LOP) has been used extensively to study market integration of forest products. This paper applies the Johansen multivariate cointegration procedure to test the law of one price for five regional markets (Atlantic Canada, Quebec, Ontario, Prairies and British Columbia) of softwood lumber in Canada using quarterly data for the 1981–1997 period. The order of integration of each price series was determined using the augmented Dickey–Fuller test with and without the possibility of structural breaks. The results from both tests showed that all five price series were I(1). The hypothesis that the LOP holds for all five regional softwood lumber markets was not supported by the Johansen multivariate test. Pairwise testing of the LOP under the single cointegration vector identified in the data showed no evidence that the markets for softwood lumber in Canada are integrated. The results suggest that there is no single market for softwood lumber in Canada, but rather, a series of geographically distinct markets.