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Testing rational expectations in primary commodity markets

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  • Luca Pieroni
  • Matteo Ricciarelli

Abstract

The standard method used to test the rational expectations hypothesis (REH) in primary commodity markets is by means of a structural approach. In this paper, a parsimonious vector error correction model in the price and stock equation is derived that maintains almost complete information of the underlying structural model. The empirical section utilizes 1955-2000 US copper data to investigate the properties of the model extended to the macroeconomic variables. The estimation results are statistically robust and are in keeping with economic theory. Three different results are found: (i) price adjustments depend on the short-run dynamic of the stock equation, whereas the long-run dynamic is statistically rejected; (ii) the over-identification restrictions, including the test for the REH, are not rejected; (iii) the forecast simulations on price are well performed.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 37 (2005)
Issue (Month): 15 ()
Pages: 1705-1718

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Handle: RePEc:taf:applec:v:37:y:2005:i:15:p:1705-1718

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  1. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  2. Claudio Agostini, 2006. "Estimating Market Power in the US Copper Industry," Review of Industrial Organization, Springer, vol. 28(1), pages 17-39, 02.
  3. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
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Cited by:
  1. Melisso Boschi & Luca Pieroni, 2008. "Aluminium market and the macroeconomy," Quaderni del Dipartimento di Economia, Finanza e Statistica 42/2008, Università di Perugia, Dipartimento Economia, Finanza e Statistica.
  2. Luca Pieroni & Matteo Ricciarelli, 2005. "Modelling Dynamic Storage Function in Commodity Markets:Theory and Evidence," Quaderni del Dipartimento di Economia, Finanza e Statistica 11/2005, Università di Perugia, Dipartimento Economia, Finanza e Statistica.

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