Bubble Troubles? Rational Storage, Mean Reversion, and Runs in Commodity Prices
In: The Economics of Food Price Volatility
High and volatile prices of major commodities have generated a wide array of analyses and policy prescriptions, including influential studies identifying price bubbles in periods of high volatility. Here we consider a model of the market for a storable commodity in which price expectations are unbounded. We derive its implications for price time series and empirical tests of price behavior. In this model commodity price is equal to marginal consumption value, and hence bubbles as defined in financial economics cannot occur. However the model generates episodes of price runs that could be characterized as "explosive" and might seem to be bubble-like. At sufficiently long holding periods, a price path can yield average returns consistent with mean reversion, even though the long run expectation of price is infinite.
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|This chapter was published in: ||This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number
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- Eugenio S. A. Bobenrieth H. & Juan R. A. Bobenrieth H. & Brian D. Wright, 2002. "A Commodity Price Process with a Unique Continuous Invariant Distribution Having Infinite Mean," Econometrica, Econometric Society, vol. 70(3), pages 1213-1219, May.
- Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
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