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Butter Mountains, Milk Lakes and Optimal Price Limiters

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It is known that simple price limiters may have unexpected consequences in irregular commodity price fluctuations between bull and bear markets and complicated impacts on the size of buffer stocks. In particular, imposing a lower price boundary may lead to a huge buffer stock, e.g. to a ?butter mountain? or a ?milk lake? and this is a real problem for regulators since storage costs may become impossible to finance over time. The relation between price limiters and the size of buffer stocks is nontrivial and there may exist some optimal price limiters which require only weak market interventions and thus provide a rather inexpensive option to regulate commodity markets. In this paper, we use a simple commodity market model to explore the relation between price limiters and the average growth rate of the buffer stocks. It is found that these optimal price limiter levels are simply the minimum values of unstable periodic orbits of the underlying deterministic system.

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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 158.

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Length: 11
Date of creation: 01 May 2005
Date of revision:
Handle: RePEc:uts:rpaper:158

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Keywords: commodity markets; price stabilization; limiter control; butter mountains and milk lakes;

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  1. Day, Richard H. & Huang, Weihong, 1990. "Bulls, bears and market sheep," Journal of Economic Behavior & Organization, Elsevier, vol. 14(3), pages 299-329, December.
  2. He, Xue-Zhong & Westerhoff, Frank H., 2005. "Commodity markets, price limiters and speculative price dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 29(9), pages 1577-1596, September.
  3. Brock, W.A. & Hommes, C.H., 1996. "A Rational Route to Randomness," Working papers 9530r, Wisconsin Madison - Social Systems.
  4. J. Doyne Farmer & Shareen Joshi, 2000. "The Price Dynamics of Common Trading Strategies," Working Papers 00-12-069, Santa Fe Institute.
  5. Lux, T. & M. Marchesi, . "Volatility Clustering in Financial Markets: A Micro-Simulation of Interacting Agents," Discussion Paper Serie B 437, University of Bonn, Germany, revised Jul 1998.
  6. Newbery, David M, 1989. "The Theory of Food Price Stabilisation," Economic Journal, Royal Economic Society, vol. 99(398), pages 1065-82, December.
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