HOTELLING CONFRONTS CAPM - A TEST OF THE THEORY OF EXHAUSTIBLE RESOURCES

A model of pricing of natural-resource commodities that integrates fin ancial and product markets is derived and tested. The model unifies tw o strands of the economic and financial literature: one that builds on the Hotelling model of pricing of exhaustible resources and the other that extends the Capital-Asset-Pricing Model of pricing risky assets. Tests of the predictions make use of a cost function that was estimat ed from a panel of small Canadian copper mines (Young 1992). Our tests fail to reject the theoretical restrictions that are implied by the H otelling/CAPM model.