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The empirical relevance of the competitive storage model

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  • Cafiero, Carlo
  • Bobenrieth H., Eugenio S.A.
  • Bobenrieth H., Juan R.A.
  • Wright, Brian D.

Abstract

The empirical relevance of models of competitive storage arbitrage in explaining commodity price behavior has been seriously challenged in a series of pathbreaking papers by (Deaton and Laroque, 1992), (Deaton and Laroque, 1995) and (Deaton and Laroque, 1996). Here we address their major criticism, that the model is in general unable to explain the degree of serial correlation observed in the prices of twelve major commodities. First, we present a simple numerical version of their model which, contrary to Deaton and Laroque (1992), can generate the high levels of serial correlation observed in commodity prices, if it is parameterized to generate realistic levels of price variation. Then, after estimating the (Deaton and Laroque, 1995) and (Deaton and Laroque, 1996) model using their data set, model specification and econometric approach, we show that the use of a much finer grid to approximate the equilibrium price function yields quite different estimates for most commodities. Results are obtained for coffee, copper, jute, maize, palm oil, sugar and tin that support the specifications of the storage model with positive constant marginal storage cost and no deterioration as in Gustafson (1958a). Consumption demand has a low response to price and, except for sugar, stockouts are infrequent. The observed magnitudes of serial correlation of price match those implied by the estimated model.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 162 (2011)
Issue (Month): 1 (May)
Pages: 44-54

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Handle: RePEc:eee:econom:v:162:y:2011:i:1:p:44-54

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Web page: http://www.elsevier.com/locate/jeconom

Related research

Keywords: Autocorrelation Commodity prices Pseudo maximum likelihood Simulation Storage;

References

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  1. Michaelides, Alexander & Ng, Serena, 2000. "Estimating the rational expectations model of speculative storage: A Monte Carlo comparison of three simulation estimators," Journal of Econometrics, Elsevier, vol. 96(2), pages 231-266, June.
  2. Angus Deaton & Guy Laroque, 2002. "A Model of Commodity Prices after Sir Arthur Lewis," Working Papers 2002-19, Centre de Recherche en Economie et Statistique.
  3. Deaton, A. & Laroque, G., 1989. "On The Behavior Of Commodity Prices," Papers 145, Princeton, Woodrow Wilson School - Development Studies.
  4. Wright, Brian D & Williams, Jeffrey C, 1982. "The Economic Role of Commodity Storage," Economic Journal, Royal Economic Society, vol. 92(367), pages 596-614, September.
  5. Albert Park, 2006. "Risk and Household Grain Management in Developing Countries," Economic Journal, Royal Economic Society, vol. 116(514), pages 1088-1115, October.
  6. Gourieroux, Christian & Monfort, Alain & Trognon, Alain, 1984. "Pseudo Maximum Likelihood Methods: Theory," Econometrica, Econometric Society, vol. 52(3), pages 681-700, May.
  7. Williams,Jeffrey C. & Wright,Brian D., 1991. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521326162.
  8. Working, Holbrook & Hobe, Adelaide M., 1929. "The Post-Harvest Depression of Wheat Prices," Wheat Studies, Stanford University, Food Research Institute, issue 01, November.
  9. Miranda, Mario J & Helmberger, Peter G, 1988. "The Effects of Commodity Price Stabilization Programs," American Economic Review, American Economic Association, vol. 78(1), pages 46-58, March.
  10. Bobenrieth H, Eugenio S A & Bobenrieth H, Juan R A & Wright, Brian D, 2004. "A Model of Supply of Storage," Economic Development and Cultural Change, University of Chicago Press, vol. 52(3), pages 605-16, April.
  11. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
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