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Bubble Troubles? Rational Storage, Mean Reversion, and Runs in Commodity Prices

In: The Economics of Food Price Volatility


  • Eugenio S. A. Bobenrieth
  • Juan R. A. Bobenrieth
  • Brian D. Wright


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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Suggested Citation

  • Eugenio S. A. Bobenrieth & Juan R. A. Bobenrieth & Brian D. Wright, 2014. "Bubble Troubles? Rational Storage, Mean Reversion, and Runs in Commodity Prices," NBER Chapters,in: The Economics of Food Price Volatility, pages 193-208 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:12812

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    References listed on IDEAS

    1. 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.
    2. 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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    Cited by:

    1. Ehsan Ahmed & J. Rosser & Jamshed Uppal, 2014. "Are there nonlinear speculative bubbles in commodities prices?," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 36(3), pages 415-438.
    2. Etienne, Xiaoli L. & Irwin, Scott H. & Garcia, Philip, 2014. "Bubbles in food commodity markets: Four decades of evidence," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 129-155.

    More about this item

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices


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