Explaining the Persistence of Commodity Prices
AbstractThis paper extends the Competitive Storage Model by incorporating prominent features of the production process and financial markets. A major limitation of this basic model is that it cannot successfully explain the degree of serial correlation observed in actual data. The proposed extensions build on the observation that in order to generate a high degree of price persistence, a model must incorporate features such that agents are willing to hold stocks more often than predicted by the basic model. We therefore allow unique characteristics of the production and trading mechanisms to provide the required incentives. Specifically, the proposed models introduce (i) gestation lags in production with heteroskedastic supply shocks, (ii) multiperiod forward contracts, and (iii) a convenience return to inventory holding. The rational expectations solutions for twelve commodities are numerically solved. Simulations are then employed to assess the effects of the above extensions on the time series properties of commodity prices. Results indicate that each of the features above partially account for the persistence and occasional spikes observed in actual data. Evidence is presented that the precautionary demand for stocks might play a substantial role in the dynamics of commodity prices.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 374.
Length: 25 pages
Date of creation: 01 Apr 1997
Date of revision:
Contact details of provider:
Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Web page: http://fmwww.bc.edu/EC/
More information through EDIRC
commodity prices; persistence; speculative storage;
Other versions of this item:
- B4 - Schools of Economic Thought and Methodology - - Economic Methodology
- G1 - Financial Economics - - General Financial Markets
- Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- John B. Taylor & Harald Uhlig, 1990.
"Solving Nonlinear Stochastic Growth Models: A Comparison of Alternative Solution Methods,"
NBER Working Papers
3117, National Bureau of Economic Research, Inc.
- Taylor, John B & Uhlig, Harald, 1990. "Solving Nonlinear Stochastic Growth Models: A Comparison of Alternative Solution Methods," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 1-17, January.
- Pindyck, Robert S., 1991.
"The present value model of rational commodity pricing,"
3354-91., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Pindyck, Robert S, 1993. "The Present Value Model of Rational Commodity Pricing," Economic Journal, Royal Economic Society, vol. 103(418), pages 511-30, May.
- Robert S. Pindyck, 1993. "The Present Value Model of Rational Commodity Pricing," NBER Working Papers 4083, National Bureau of Economic Research, Inc.
- Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
- repec:nbr:nberre:0126 is not listed on IDEAS
- Lester G. Telser, 1958. "Futures Trading and the Storage of Cotton and Wheat," Journal of Political Economy, University of Chicago Press, vol. 66, pages 233.
- Chambers, Marcus J & Bailey, Roy E, 1996.
"A Theory of Commodity Price Fluctuations,"
Journal of Political Economy,
University of Chicago Press, vol. 104(5), pages 924-57, October.
- Newbery, David M G & Stiglitz, Joseph E, 1982. "Optimal Commodity Stock-piling Rules," Oxford Economic Papers, Oxford University Press, vol. 34(3), pages 403-27, November.
- Deaton, A. & Laroque, G., 1989.
"On The Behavior Of Commodity Prices,"
145, Princeton, Woodrow Wilson School - Development Studies.
- Scheinkman, Jose A & Schechtman, Jack, 1983. "A Simple Competitive Model with Production and Storage," Review of Economic Studies, Wiley Blackwell, vol. 50(3), pages 427-41, July.
- Williams,Jeffrey C. & Wright,Brian D., 2005.
"Storage and Commodity Markets,"
Cambridge University Press, number 9780521023399, December.
- Fama, Eugene F & French, Kenneth R, 1987. "Commodity Futures Prices: Some Evidence on Forecast Power, Premiums,and the Theory of Storage," The Journal of Business, University of Chicago Press, vol. 60(1), pages 55-73, January.
- Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
- Taylor, John B, 1980.
"Aggregate Dynamics and Staggered Contracts,"
Journal of Political Economy,
University of Chicago Press, vol. 88(1), pages 1-23, February.
- den Haan, Wouter J & Marcet, Albert, 1990.
"Solving the Stochastic Growth Model by Parameterizing Expectations,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 8(1), pages 31-34, January.
- Wouter Denhaan & Albert Marcet, 1990. "FORTRAN code for Simulation Parameterized Expecations Algorithm," QM&RBC Codes 57, Quantitative Macroeconomics & Real Business Cycles.
- Gustafson, Robert L., 1958. "Carryover levels for grains: A method for determining amounts that are optimal under specified conditions," Technical Bulletins 157231, United States Department of Agriculture, Economic Research Service.
- Bryan Routledge & Duane Seppi & Chester Spatt, .
"Equilibrium Forward Curves for Commodities,"
GSIA Working Papers
1997-50, Carnegie Mellon University, Tepper School of Business.
- Schwartz, Eduardo S, 1997. " The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-73, July.
- Gibson, Rajna & Schwartz, Eduardo S, 1990. " Stochastic Convenience Yield and the Pricing of Oil Contingent Claims," Journal of Finance, American Finance Association, vol. 45(3), pages 959-76, July.
- Fama, Eugene F & French, Kenneth R, 1988. " Business Cycles and the Behavior of Metals Prices," Journal of Finance, American Finance Association, vol. 43(5), pages 1075-93, December.
- Breeden, Douglas T, 1980. " Consumption Risk in Futures Markets," Journal of Finance, American Finance Association, vol. 35(2), pages 503-20, May.
- Dusak, Katherine, 1973. "Futures Trading and Investor Returns: An Investigation of Commodity Market Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1387-1406, Nov.-Dec..
- Anonymous, 1934. "Price Relations Between May and New-Crop Wheat Futures at Chicago Since 1885," Wheat Studies, Stanford University, Food Research Institute, issue 05, February.
- 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.
- Dufresne, Daniel & Vázquez-Abad, Felisa, 2012. "Cobweb theorems with production lags and price forecasting," Economics Discussion Papers 2012-17, Kiel Institute for the World Economy.
- 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.
- Pieroni, Luca & Ricciarelli, Matteo, 2008. "Modelling dynamic storage function in commodity markets: Theory and evidence," Economic Modelling, Elsevier, vol. 25(5), pages 1080-1092, September.
- Sklavos, Konstantinos & Dam, Lammertjan & Scholtens, Bert, 2013. "The liquidity of energy stocks," Energy Economics, Elsevier, vol. 38(C), pages 168-175.
- Moledina, Amyaz A. & Roe, Terry L. & Shane, Mathew, 2004. "Measuring Commodity Price Volatility And The Welfare Consequences Of Eliminating Volatility," 2004 Annual meeting, August 1-4, Denver, CO 19963, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
- Eyal Dvir & Ken Rogoff, 2009. "The Three Epochs of Oil," Boston College Working Papers in Economics 706, Boston College Department of Economics.
- Eyal Dvir & Kenneth S. Rogoff, 2009. "Three Epochs of Oil," NBER Working Papers 14927, National Bureau of Economic Research, Inc.
- Loening, Josef L. & Durevall, Dick & Ayalew Birru, Yohannes, 2009.
"Inflation Dynamics and Food Prices in an Agricultural Economy: The Case of Ethiopia,"
Working Papers in Economics
347, University of Gothenburg, Department of Economics.
- Loening, Josef L. & Durevall, Dick & Birru, Yohannes A., 2009. "Inflation dynamics and food prices in an agricultural economy : the case of Ethiopia," Policy Research Working Paper Series 4969, The World Bank.
- Power, Gabriel J. & Turvey, Calum G., 2008. "On Term Structure Models of Commodity Futures Prices and the Kaldor-Working Hypothesis," 2008 Conference, April 21-22, 2008, St. Louis, Missouri 37608, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
- Vivian, Andrew & Wohar, Mark E., 2012. "Commodity volatility breaks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(2), pages 395-422.
- Nishimura, Kazuo & Stachurski, John, 2009.
"Equilibrium storage with multiple commodities,"
Journal of Mathematical Economics,
Elsevier, vol. 45(1-2), pages 80-96, January.
- Ashima Goyal & Shruti Tripathi, 2012. "Regulations and price discovery: oil spot and futures markets," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2012-016, Indira Gandhi Institute of Development Research, Mumbai, India.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F Baum).
If references are entirely missing, you can add them using this form.