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Estimating a Nonlinear Rational Expectations Commodity Price Model with Unobservable State Variables

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  • Deaton, Angus
  • Laroque, Guy

Abstract

This paper is concerned with the estimation of a model in which a possibly serially correlated stochastic process, the "harvest" of an agricultural commodity, generates a competitive price in a market comprising both final consumers and risk-neutral speculators who can store the commodity at a cost in the anticipation of profit. Because storage cannot be negative, the relationship between prices and harvests is inherently nonlinear and is an unpromising candidate for a linear-quadratic model, or for linearization more generally. Instead, we calculate numerically a policy function in which price is a function of two unobservable state variables, the harvest and current availability, and we use the result to fit the price data. Copyright 1995 by John Wiley & Sons, Ltd.

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  • Deaton, Angus & Laroque, Guy, 1995. "Estimating a Nonlinear Rational Expectations Commodity Price Model with Unobservable State Variables," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(S), pages 9-40, Suppl. De.
    • Handle: RePEc:jae:japmet:v:10:y:1995:i:s:p:s9-40
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    1. Guerra Vallejos, Ernesto & Bobenrieth Hochfarber, Eugenio & Bobenrieth Hochfarber, Juan & Wright, Brian D., 2021. "Solving dynamic stochastic models with multiple occasionally binding constraints," Economic Modelling, Elsevier, vol. 105(C).
    2. Christophe Gouel, 2012. "Agricultural Price Instability: A Survey Of Competing Explanations And Remedies," Journal of Economic Surveys, Wiley Blackwell, vol. 26(1), pages 129-156, February.
    3. Ivanic, Maros & Martin, Will, 2014. "Implications of domestic price insulation for global food price behavior," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 272-288.
    4. Assa, Hirbod & Sharifi, Hossein & Lyons, Andrew, 2021. "An examination of the role of price insurance products in stimulating investment in agriculture supply chains for sustained productivity," European Journal of Operational Research, Elsevier, vol. 288(3), pages 918-934.
    5. Goodwin, Barry K. & Holt, Matthew T. & Prestemon, Jeffrey P., 2019. "Nonlinear exchange rate pass-through in timber products: The case of oriented strand board in Canada and the United States," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    6. Ghoshray, Atanu, 2011. "A reexamination of trends in primary commodity prices," Journal of Development Economics, Elsevier, vol. 95(2), pages 242-251, July.
    7. Michaelides, Alexander & Ng, Serena, 2000. "Estimating the rational expectations model of speculative storage: A Monte Carlo comparison of three simulation estimators," Journal of Econometrics, Elsevier, vol. 96(2), pages 231-266, June.
    8. Kelley, Clare & Lanot, Gauthier, 2002. "Consumption Patterns Over Pay Periods," Economic Research Papers 269469, University of Warwick - Department of Economics.
    9. Brunetti, Celso & Gilbert, Christopher L., 1995. "Metals price volatility, 1972-1995," Resources Policy, Elsevier, vol. 21(4), pages 237-254, December.
    10. Christophe Gouel, 2013. "Comparing Numerical Methods for Solving the Competitive Storage Model," Computational Economics, Springer;Society for Computational Economics, vol. 41(2), pages 267-295, February.
    11. Joseph V. Balagtas & Matthew T. Holt, 2009. "The Commodity Terms of Trade, Unit Roots, and Nonlinear Alternatives: A Smooth Transition Approach," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(1), pages 87-105.
    12. Kurmas Akdogan, 2018. "Mean-reversion and structural change in European food prices," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 18(4), pages 163-173.
    13. Nazlioglu, Saban, 2011. "World oil and agricultural commodity prices: Evidence from nonlinear causality," Energy Policy, Elsevier, vol. 39(5), pages 2935-2943, May.
    14. Chowdhury, Mohammad Ashraful Ferdous & Meo, Muhammad Saeed & Uddin, Ajim & Haque, Md. Mahmudul, 2021. "Asymmetric effect of energy price on commodity price: New evidence from NARDL and time frequency wavelet approaches," Energy, Elsevier, vol. 231(C).
    15. Baldursson, Fridrik M., 1999. "Modelling the price of industrial commodities," Economic Modelling, Elsevier, vol. 16(3), pages 331-353, August.
    16. Kleppe, Tore Selland & Oglend, Atle, 2017. "Estimating the competitive storage model: A simulated likelihood approach," Econometrics and Statistics, Elsevier, vol. 4(C), pages 39-56.
    17. David M Arseneau & Sylvain Leduc, 2013. "Commodity Price Movements in a General Equilibrium Model of Storage," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(1), pages 199-224, April.
    18. Oglend, Atle & Kleppe, Tore Selland, 2017. "On the behavior of commodity prices when speculative storage is bounded," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 52-69.
    19. Colin A. Carter & Gordon C. Rausser & Aaron Smith, 2011. "Commodity Booms and Busts," Annual Review of Resource Economics, Annual Reviews, vol. 3(1), pages 87-118, October.
    20. Pietola, Kyösti & Liu, Xing & Robles, Miguel, 2010. "Price, inventories, and volatility in the global wheat market," IFPRI discussion papers 996, International Food Policy Research Institute (IFPRI).
    21. Cafiero, Carlo & Bobenrieth H., Eugenio S.A. & Bobenrieth H., Juan R.A. & Wright, Brian D., 2011. "The empirical relevance of the competitive storage model," Journal of Econometrics, Elsevier, vol. 162(1), pages 44-54, May.
    22. Jin, Xin, 2019. "The role of market expectations in commodity price dynamics: Evidence from oil data," Journal of International Money and Finance, Elsevier, vol. 90(C), pages 1-18.
    23. Scandizzo, Pasquale Lucio & Savastano, Sara & Vezzani, Antonio, 2010. "The deterministic and speculative component of the terms of trade of primary commodities: An “Eclectic” Real Option value approach," 114th Seminar, April 15-16, 2010, Berlin, Germany 61086, European Association of Agricultural Economists.
    24. Gronwald, Marc, 2016. "Explosive oil prices," Energy Economics, Elsevier, vol. 60(C), pages 1-5.

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