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The Supply Of Storage Under Heterogeneous Expectations

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  • Frechette, Darren L.
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    Abstract

    Expected prices for storable commodities often lie below spot prices plus interest and marginal storage charges. Recently this gap has been explained as the value of a call option held by a representative storer whenever a positive probability exists that stocks could dwindle to zero. However, the probability of an aggregate stock-out is effectively zero in most markets most of the time. This paper presents an alternative model that explains the gap as an equilibrium between fundamentals traders and noise traders. Applications of the model suggest that rational agents make up 84 percent of the U.S. copper market, and more than 95 percent of the corn and wheat markets.

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    Bibliographic Info

    Article provided by Southern Agricultural Economics Association in its journal Journal of Agricultural and Applied Economics.

    Volume (Year): 31 (1999)
    Issue (Month): 03 (December)
    Pages:

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    Handle: RePEc:ags:joaaec:15149

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    Web page: http://www.saea.org/jaae/jaae.htm
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    Keywords: storage; heterogeneous expectations; noise traders; Marketing;

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    1. Foster, Kenneth A. & Mwanaumo, Anthony, 1995. "Estimation of dynamic maize supply response in Zambia," Agricultural Economics, Blackwell, vol. 12(1), pages 99-107, April.
    2. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August.
    3. Winter-Nelson, Alex, 1996. "Expectations, supply response, and marketing boards: An example from Kenya," Agricultural Economics, Blackwell, vol. 14(1), pages 21-31, April.
    4. Thijssen, Geert, 1994. "Supply Response and Dynamic Factor Demand of Dutch Dairy Farms," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 21(2), pages 241-58.
    5. Chavas, Jean-Paul, 1999. "On The Economic Rationality Of Market Participants: The Case Of Expectations In The U.S. Pork Market," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(01), July.
    6. Nerlove, Marc & Fornari, Ilaria, 1998. "Quasi-rational expectations, an alternative to fully rational expectations: An application to US beef cattle supply," Journal of Econometrics, Elsevier, vol. 83(1-2), pages 129-161.
    7. Miranda, Mario J, 1998. "Numerical Strategies for Solving the Nonlinear Rational Expectations Commodity Market Model," Computational Economics, Society for Computational Economics, vol. 11(1-2), pages 71-87, April.
    8. Frankel, Jeffrey A & Froot, Kenneth A, 1986. "Understanding the U.S. Dollar in the Eighties: The Expectations of Chartists and Fundamentalists," The Economic Record, The Economic Society of Australia, vol. 0(0), pages 24-38, Supplemen.
    9. Robert S. Pindyck, 1990. "Inventories and the Short-Run Dynamics of Commodity Prices," NBER Working Papers 3295, National Bureau of Economic Research, Inc.
    10. Brennan, Donna & Williams, Jeffrey & Wright, Brian D, 1997. "Convenience Yield without the Convenience: A Spatial-Temporal Interpretation of Storage under Backwardation," Economic Journal, Royal Economic Society, vol. 107(443), pages 1009-22, July.
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    Cited by:
    1. Fabienne Féménia & Alexandre Gohin, 2010. "Faut-il une intervention publique pour stabiliser les marchés agricoles ? Revue des questions non résolues," Review of Agricultural and Environmental Studies - Revue d'Etudes en Agriculture et Environnement, INRA Department of Economics, vol. 91(4), pages 435-456.

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