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Abstract
We test the economic theory that price differences in spatially separated markets will be equalized
through arbitrage activity using time series data on housing frame lumber prices in different regions
of the United States. Wildfires, hurricanes, and other extreme weather events, as well as large swings
in regional housing demand, can create shocks to geographically different lumber markets. The degree
to which different lumber producing markets are interrelated is of interest to better understand how
prices will respond to such shocks. Linked markets will realize adjustments that keep prices as
equal as possible while allowing for differences directly related to the transfer costs necessary for
arbitrage activity. Overly simplified tests will seem to support a lack of price transmission between
markets or lag times between price adjustments that seem to contradict standard theory. This paper
implements non-linear threshold models and non-parametric estimation techniques to demonstrate
a more detailed price-linkage relationship that is better supported by economic theory.