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On The Solution Of The Dynamic Rational Expectations Commodity Storage Model In The Presence Of Stockholding By Speculators And Processors

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  • Cesar Revoredo

    (University of California, Davis)

Abstract

The paper extends the literature of the dynamic rational expectations commodity storage model, to the case where speculators (speculative stocks) and processing firms (working stocks) are stockholders.So far the literature has been focused on solving the storage model for each type of stockholder independently, either for the case of speculative storage (see Williams and Wright, 1991 and Deaton and Laroque, 1992), or for the case of working stocks (Carter and Revoredo, 1999, show that the supply of storage cost approach - Miranda and Glauber, 1993; and Miranda and Rui, 1996 - reflects only the stocks carried by processing firms, when inventories of commodities (raw materials) are modeled as factors of production following Ramey, 1989). Almost no effort has been made for modeling the interaction of both agents (a notable exception is Lowry, 1988 but not in the context of the competitive storage model). The interaction of both agents is crucial to capture a higher number of stylized facts in commodity markets, such as the dynamic behavior of commodity prices (see Deaton and Laroque, 1992 and Miranda and Rui, 1996), and the Working curve (i.e., empirical curve that relates commodity price spreads with stocks, see Working, 1933).The model is solved by means of a modified version of the polynomial approximation technique used by Williams and Wright (1991). Two versions of the algorithm are presented (with and without a price responsive supply). Finally, the model is simulated to show the differences in the resulting market demand with respect to the other two models (speculative stocks and working stocks) and the differences in the resulting Working curves.

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2000 with number 42.

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Date of creation: 05 Jul 2000
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Handle: RePEc:sce:scecf0:42

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  1. Ramey, Valerie A. & West, Kenneth D., 1999. "Inventories," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 13, pages 863-923 Elsevier.
  2. Newbery, David M, 1989. "The Theory of Food Price Stabilisation," Economic Journal, Royal Economic Society, vol. 99(398), pages 1065-82, December.
  3. Deaton, A. & Laroque, G., 1989. "On The Behavior Of Commodity Prices," Papers 145, Princeton, Woodrow Wilson School - Development Studies.
  4. 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.
  5. Williams,Jeffrey C. & Wright,Brian D., 1991. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521326162, April.
  6. 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.
  7. Ng, Serena, 1996. "Looking for evidence of speculative stockholding in commodity markets," Journal of Economic Dynamics and Control, Elsevier, vol. 20(1-3), pages 123-143.
  8. repec:fth:inseep:8909 is not listed on IDEAS
  9. 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.
  10. Miranda, Mario J & Glauber, Joseph W, 1993. "Estimation of Dynamic Nonlinear Rational Expectations Models of Primary Commodity Markets with Private and Government Stockholding," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 463-70, August.
  11. Brennan, Donna & Williams, Jeffrey & Wright, Brian D, 1997. "Convenience Yield without the Convenience: A Spatial-Temporal Interpretation of Storage under Backwardation," Economic Journal, Royal Economic Society, vol. 107(443), pages 1009-22, July.
  12. 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.
  13. Gray, Roger W. & Peck, Anne E., 1981. "The Chicago Wheat Futures Market: Recent Problems in Historical Perspective," Food Research Institute Studies, Stanford University, Food Research Institute, issue 01.
  14. Wright, Brian D, 1979. "The Effects of Ideal Production Stabilization: A Welfare Analysis Under Rational Behavior," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 1011-33, October.
  15. Working, Holbrook, 1933. "Price Relations Between July And September Wheat Futures At Chicago Since 1885," Wheat Studies, Stanford University, Food Research Institute, issue 06, March.
  16. Bruce L. Gardner & Ram�n L�pez, 1996. "The Inefficiency of Interest-Rate Subsidies in Commodity Price Stabilization," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(3), pages 508-516.
  17. Gilbert, Christopher L., 1990. "The rational expectations hypothesis in models of primary commodity prices," Policy Research Working Paper Series 384, The World Bank.
  18. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, December.
  19. Lowry, M. Newton, 1988. "Working stocks and speculative stocks," Economics Letters, Elsevier, vol. 28(4), pages 311-314.
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