Price Formation in Commodity Markets
AbstractThis paper develops a theory-consistent market model for storable commodities and illustrates its characterization of the data-generating process for a set of major traded commodities. The dynamics of the system incorporate recent advances in modeling techniques. Cointegrated variables in the demand functions are represented by the error correction mechanism (ECM), and expected prices in the stock demand relationship are generated by a rational expectations process. The outside-sample performance of the model is tested against the pure time-series model used to formulate expected prices, and is shown to have a smaller mean square error than that of the time-series model. Thus the model provides comparatively efficient forecasts and, unlike models constructed in their reduced form, permits consideration of key behavioral relationships in commodity markets. Copyright 1991 by John Wiley & Sons, Ltd.
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Bibliographic InfoArticle provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.
Volume (Year): 6 (1991)
Issue (Month): 3 (July-Sept.)
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Web page: http://www.interscience.wiley.com/jpages/0883-7252/
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- Donald Coletti & René Lalonde & Paul Masson & Dirk Muir & Stephen Snudden, 2012. "Commodities and Monetary Policy: Implications for Inflation and Price Level Targeting," Working Papers 12-16, Bank of Canada.
- Michael S. Webb & Viv B Hall, 2009. "Application Of A Dynamic Panel Data Estimator To Cross-Country Coffee Demand: A Tale Of Two Eras," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 34(1), pages 1-17, June.
- Eduardo López E. & Víctor Riquelme P., 2010. "Auge, Colapso y Recuperación de los Precios de Materias Primas entre 2002 y 2010: ¿Qué Hay Detrás?," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 13(2), pages 129-145, April.
- Ng, Victor K. & Pirrong, Stephen Craig, 1996. "Price dynamics in refined petroleum spot and futures markets," Journal of Empirical Finance, Elsevier, vol. 2(4), pages 359-388, February.
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