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How much of commodity price behavior can a rational expectations storage model explain?

  • Hikaru Hanawa Peterson
  • William G. Tomek

A rational expectations competitive storage model was applied to the U.S. corn market, to assess the aptness of this framework in explaining monthly price behavior in an actual commodity market. Relative to previous models, extensive realism was added to the model, in terms of how production activities and storage costs are specified. By modeling convenience yield, "backwardation" in prices between crop years did not depend on the unrealistic assumption of zero ending stocks. Our model generated cash prices that were distributed with positive skewness and kurtosis, and mean and variance that increased over the storage season, comparable to the persistence and the occasional spikes observed in commodity prices. Futures prices were generated as conditional expectations of cash prices at contract maturity, and the variances of futures prices exhibited realistic time-to-maturity and seasonal patterns. Model realizations of cash and futures prices over many "years" were used to demonstrate the wide variety of price behaviors that could be observed in an efficient market with a similar market structure, implying that economic and policy implications drawn from short, historical samples of prices could be misleading. Copyright 2005 International Association of Agricultural Economics.

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Article provided by International Association of Agricultural Economists in its journal Agricultural Economics.

Volume (Year): 33 (2005)
Issue (Month): 3 (November)
Pages: 289-303

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Handle: RePEc:bla:agecon:v:33:y:2005:i:3:p:289-303
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  1. Ng, S., 1995. "Looking for Evidence of Speculative Stockholding in Commodity Markets," Cahiers de recherche 9514, Universite de Montreal, Departement de sciences economiques.
  2. Roberts, Matthew C. & Goodwin, Barry K. & Coble, Keith H., 1998. "Measurement Of Price Risk In Revenue Insurance: Implications Of Distributional Assumptions," 1998 Annual meeting, August 2-5, Salt Lake City, UT 20840, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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  19. repec:cup:cbooks:9780521326162 is not listed on IDEAS
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