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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.

Suggested Citation

  • Cesar Revoredo, 2000. "On The Solution Of The Dynamic Rational Expectations Commodity Storage Model In The Presence Of Stockholding By Speculators And Processors," Computing in Economics and Finance 2000 42, Society for Computational Economics.
    • Handle: RePEc:sce:scecf0:42
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    References listed on IDEAS

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