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How much of commodity price behavior can a rational expectations storage model explain?

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  • Hikaru Hanawa Peterson
  • William G. Tomek

Abstract

A rational expectations competitive storage model was applied to the U.S. corn market, to assess the aptness of this framework in explaining monthly price behavior in an actual commodity market. Relative to previous models, extensive realism was added to the model, in terms of how production activities and storage costs are specified. By modeling convenience yield, "backwardation" in prices between crop years did not depend on the unrealistic assumption of zero ending stocks. Our model generated cash prices that were distributed with positive skewness and kurtosis, and mean and variance that increased over the storage season, comparable to the persistence and the occasional spikes observed in commodity prices. Futures prices were generated as conditional expectations of cash prices at contract maturity, and the variances of futures prices exhibited realistic time-to-maturity and seasonal patterns. Model realizations of cash and futures prices over many "years" were used to demonstrate the wide variety of price behaviors that could be observed in an efficient market with a similar market structure, implying that economic and policy implications drawn from short, historical samples of prices could be misleading. Copyright 2005 International Association of Agricultural Economics.

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Bibliographic Info

Article provided by International Association of Agricultural Economists in its journal Agricultural Economics.

Volume (Year): 33 (2005)
Issue (Month): 3 (November)
Pages: 289-303

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Handle: RePEc:bla:agecon:v:33:y:2005:i:3:p:289-303

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  5. Sergio H. Lence & Marvin L. Hayenga, 2001. "On the Pitfalls of Multi-Year Rollover Hedges: The Case of Hedge-to-Arrive Contracts," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 83(1), pages 107-119.
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Cited by:
  1. Franken, Jason R.V. & Garcia, Philip & Irwin, Scott H., 2006. "Do Interest Rates Explain Disaggregate Commodity Price Growth?," 2006 Annual meeting, July 23-26, Long Beach, CA, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 21319, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  2. von Braun, Joachim & Tadesse, Getaw, 2012. "Global Food Price Volatility and Spikes: An Overview of Costs, Causes, and Solutions," Discussion Papers, University of Bonn, Center for Development Research (ZEF) 120021, University of Bonn, Center for Development Research (ZEF).
  3. Kornher, Lukas & Kalkuhl, Matthias, 2013. "Food price volatility in developing countries and its determinants," 53rd Annual Conference, Berlin, Germany, September 25-27, 2013 156132, German Association of Agricultural Economists (GEWISOLA).
  4. Verpoorten, Marijke & Arora, Abhimanyu, 2011. "Food Prices, Social Unrest and the Facebook Generation," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland, European Association of Agricultural Economists 114230, European Association of Agricultural Economists.
  5. Etienne, Xiaoli L. & Irwin, Scott H. & Garcia, Philip, 2014. "Bubbles in food commodity markets: Four decades of evidence," Journal of International Money and Finance, Elsevier, Elsevier, vol. 42(C), pages 129-155.
  6. Tokovenko, Oleksiy & Gunter, Lewell F., 2008. "Quarterly Storage Model of U.S. Cotton Market: Estimation of the Basis under Rational Expectations," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 6435, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  7. Ghoshray Atanu & Kejriwal Mohitosh & Wohar Mark, 2014. "Breaks, trends and unit roots in commodity prices: a robust investigation," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, De Gruyter, vol. 18(1), pages 23-40, February.
  8. Irwin, Scott H. & Good, Darrel L. & Martines-Filho, Joao & Batts, Ryan M., 2006. "The Pricing Performance of Market Advisory Services in Corn and Soybeans Over 1995-2004," AgMAS Project Research Reports, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics 37513, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  9. Good, Darrel L. & Irwin, Scott H. & Martines-Filho, Joao & Hagedorn, Lewis A., 2005. "The Pricing Performance of Market Advisory Services in Corn and Soybeans over 1995-2003," AgMAS Project Research Reports, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics 14775, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  10. Lin, Chuanyi & Roberts, Matthew C., 2006. "Storability on Modeling Commodity Futures Prices," 2006 Annual meeting, July 23-26, Long Beach, CA, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 21484, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  11. Shaun K. Roache, 2010. "What Explains the Rise in Food Price Volatility?," IMF Working Papers 10/129, International Monetary Fund.

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