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A staggered pricing approach to modeling speculative storage: implications for commodity price dynamics

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  • Assa, Hirbod

    ()
    (University of Liverpool)

  • Dabbous, Amal

    ()
    (Concordia University)

  • Gospodinov, Nikolay

    ()
    (Federal Reserve Bank of Atlanta)

Abstract

This paper embeds a staggered price feature into the standard speculative storage model of Deaton and Laroque (1996). Intermediate goods inventory speculators are added as an additional source of intertemporal linkage, which helps us to replicate the stylized facts of the observed commodity price dynamics. Incorporating this type of friction into the model is motivated by its ability to increase price stickiness which, gives rise to a higher degree of persistence in the first two conditional moments of commodity prices. The structural parameters of our model are estimated by the simulated method of moments using actual prices for four agricultural commodities. Simulated data are then employed to assess the effects of our staggered price approach on the time series properties of commodity prices. Our results lend empirical support to the possibility of staggered prices.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2013-08.

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Length: 30 pages
Date of creation: 01 Sep 2013
Date of revision:
Handle: RePEc:fip:fedawp:2013-08

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Related research

Keywords: commodity price determination; staggered pricing; high persistence; conditional heteroskedasticity; simulated method of moments;

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References

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  1. Serena Ng & Francisco Ruge-Murcia, 1997. "Explaining the Persistence of Commodity Prices," Boston College Working Papers in Economics 374, Boston College Department of Economics.
  2. David M. Arseneau & Sylvain Leduc, 2012. "Commodity price movements in a general equilibrium model of storage," International Finance Discussion Papers 1054, Board of Governors of the Federal Reserve System (U.S.).
  3. Mitraille, S├ębastien & Thille, Henry, 2009. "Monopoly behaviour with speculative storage," Journal of Economic Dynamics and Control, Elsevier, vol. 33(7), pages 1451-1468, July.
  4. Lee, Bong-Soo & Ingram, Beth Fisher, 1991. "Simulation estimation of time-series models," Journal of Econometrics, Elsevier, vol. 47(2-3), pages 197-205, February.
  5. Norbert Funke & Weifeng Wu & Yanliang Miao, 2011. "Reviving the Competitive Storage Model," IMF Working Papers 11/64, International Monetary Fund.
  6. Julio J. Rotemberg, 1994. "Prices, Output and Hours: An Empirical Analysis Based on a Sticky Price Model," NBER Working Papers 4948, National Bureau of Economic Research, Inc.
  7. Cafiero, Carlo & Bobenrieth H., Eugenio S.A. & Bobenrieth H., Juan R.A. & Wright, Brian D., 2011. "The empirical relevance of the competitive storage model," Journal of Econometrics, Elsevier, vol. 162(1), pages 44-54, May.
  8. Pakes, Ariel & Pollard, David, 1989. "Simulation and the Asymptotics of Optimization Estimators," Econometrica, Econometric Society, vol. 57(5), pages 1027-57, September.
  9. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399.
  10. 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.
  11. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  12. Daniel McFadden, 1987. "A Method of Simulated Moments for Estimation of Discrete Response Models Without Numerical Integration," Working papers 464, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Newbery, David M, 1984. "Commodity Price Stabilization in Imperfect or Cartelized Markets," Econometrica, Econometric Society, vol. 52(3), pages 563-78, May.
  14. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  15. Beck, Stacie E, 1993. "A Rational Expectations Model of Time Varying Risk Premia in Commodities Futures Markets: Theory and Evidence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 149-68, February.
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