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Time Delay and Noise Explaining Cyclical Fluctuations in Prices of Commodities

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Abstract

This paper suggests to model jointly time delay and random effects in economics and finance. It proposes to explain the random and often cyclical fluctuations in commodity prices as a consequence of the interplay between external noise and time delays caused by the time between initiation of production and delivery. The proposed model is formulated as a stochastic delay differential equation. The typical behavior of a commodity price index under this model will be discussed. Methods for parameter estimation and the evaluation of functionals will be proposed.

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File URL: http://www.business.uts.edu.au/qfrc/research/research_papers/rp195.pdf
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Bibliographic Info

Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 195.

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Length: 23
Date of creation: 01 Apr 2007
Date of revision:
Handle: RePEc:uts:rpaper:195

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Keywords: commodity prices; stochastic delay differential equation; cyclical behavior; scenario simulation; parameter estimation; autocorrelation function;

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  1. Uwe Kuchler & Eckhard Platen, 2000. "Strong Discrete Time Approximation of Stochastic Differential Equations with Time Delay," Research Paper Series 44, Quantitative Finance Research Centre, University of Technology, Sydney.
  2. Küchler, Uwe & Platen, Eckhard, 2001. "Weak discrete time approximation of stochastic differential equations with time delay," SFB 373 Discussion Papers 2001,30, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  3. Mackey, Michael C., 1989. "Commodity price fluctuations: Price dependent delays and nonlinearities as explanatory factors," Journal of Economic Theory, Elsevier, vol. 48(2), pages 497-509, August.
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Cited by:
  1. He, Xue-Zhong & Zheng, Min, 2010. "Dynamics of moving average rules in a continuous-time financial market model," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 615-634, December.
  2. David R. Banos & Giulia Di Nunno & Frank Proske, 2013. "Sensitivity analysis in a market with memory," Papers 1312.5116, arXiv.org.

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