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On the Economics of Commodity Price Dynamics and Price Volatility

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  • Chavas, Jean-Paul
  • Li, Jian

Abstract

This paper develops an economic analysis of commodity price dynamics and price volatility. The approach applies under general supply-demand conditions, including the role played by private and public inventory holders. Quantile autogression is used to estimate the evolving distribution of price. The usefulness of the method is illustrated in an application to two markets in China: a food market (rice) and a feed market (corn). Based on monthly data over the period 2000-2014, the econometric analysis shows how the price distributions (including skewness and kurtosis) vary across commodity markets. Using a Markov chain representation, the paper evaluates the dynamics of price volatility. It finds slow adjustments in the price distribution between short run and long run situations. The investigation also assesses the short run and long run effects of alternative economic policies on the price distributions. It finds that the Chinese price support programs have helped stabilize the domestic food market but not the feed market.

Suggested Citation

  • Chavas, Jean-Paul & Li, Jian, 2016. "On the Economics of Commodity Price Dynamics and Price Volatility," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 235070, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea16:235070
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    File URL: http://ageconsearch.umn.edu/record/235070/files/On%20the%20Economics%20of%20Commodity%20Price%20Volatility%20and%20Price%20Dynamics.pdf
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    References listed on IDEAS

    as
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    2. Koenker,Roger, 2005. "Quantile Regression," Cambridge Books, Cambridge University Press, number 9780521608275, October.
    3. Gouel, Christophe, 2013. "Optimal food price stabilisation policy," European Economic Review, Elsevier, vol. 57(C), pages 118-134.
    4. Danhong Chen & David Abler & De Zhou & Xiaohua Yu & Wyatt Thompson, 2016. "A Meta-analysis of Food Demand Elasticities for China," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 38(1), pages 50-72.
    5. Koenker, Roger & Xiao, Zhijie, 2006. "Quantile Autoregression," Journal of the American Statistical Association, American Statistical Association, vol. 101, pages 980-990, September.
    6. Dick van Dijk & Timo Terasvirta & Philip Hans Franses, 2002. "Smooth Transition Autoregressive Models — A Survey Of Recent Developments," Econometric Reviews, Taylor & Francis Journals, vol. 21(1), pages 1-47.
    7. Huang, Jikun & Rozelle, Scott & Yang, Jun, 2013. "The Political Economy of Food Pricing Policy in China," WIDER Working Paper Series 038, World Institute for Development Economic Research (UNU-WIDER).
    8. Norbert Funke & Weifeng Wu & Yanliang Miao, 2011. "Reviving the Competitive Storage Model; A Holistic Approach to Food Commodity Prices," IMF Working Papers 11/64, International Monetary Fund.
    9. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
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    12. Chavas, Jean-Paul & Hummels, David & Wright, Brian D. (ed.), 2014. "The Economics of Food Price Volatility," National Bureau of Economic Research Books, University of Chicago Press, number 9780226128924, July.
    13. Jean-Paul Chavas & David Hummels & Brian D. Wright, 2014. "The Economics of Food Price Volatility," NBER Books, National Bureau of Economic Research, Inc, number chav12-1.
    14. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399, October.
    15. 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.
    16. Gale, Fred, 2013. "Growth and Evolution in China's Agricultural Support Policies," Economic Research Report 155385, United States Department of Agriculture, Economic Research Service.
    17. 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.
    18. Jean-Paul Chavas & David Hummels & Brian D. Wright, 2014. "Introduction to "The Economics of Food Price Volatility"," NBER Chapters,in: The Economics of Food Price Volatility, pages 1-11 National Bureau of Economic Research, Inc.
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    Keywords

    Agricultural and Food Policy; Demand and Price Analysis; Risk and Uncertainty;

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