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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://purl.umn.edu/235070
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    References listed on IDEAS

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    1. Angus Deaton & Guy Laroque, 1992. "On the Behaviour of Commodity Prices," Review of Economic Studies, Oxford University Press, vol. 59(1), pages 1-23.
    2. Gouel, Christophe, 2013. "Optimal food price stabilisation policy," European Economic Review, Elsevier, vol. 57(C), pages 118-134.
    3. Koenker, Roger & Xiao, Zhijie, 2006. "Quantile Autoregression," Journal of the American Statistical Association, American Statistical Association, vol. 101, pages 980-990, September.
    4. 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.
    5. 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).
    6. Kym Anderson & Gordon Rausser & Johan Swinnen, 2013. "Political Economy of Public Policies: Insights from Distortions to Agricultural and Food Markets," Journal of Economic Literature, American Economic Association, vol. 51(2), pages 423-477, June.
    7. Koenker,Roger, 2005. "Quantile Regression," Cambridge Books, Cambridge University Press, number 9780521845731, April.
    8. 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.
    9. 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.
    10. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399.
    11. 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.
    12. 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.
    13. 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.
    14. 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.
    15. Robert L. Gustafson, 1958. "Implications of Recent Research on Optimal Storage Rules," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 40(2), pages 290-300.
    16. 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, June.
    17. Gale, Fred, 2013. "Growth and Evolution in China's Agricultural Support Policies," Economic Research Report 155385, United States Department of Agriculture, Economic Research Service.
    18. 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.
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    More about this item

    Keywords

    price dynamics; price volatility; quantile; agricultural markets; China; Agricultural and Food Policy; Demand and Price Analysis; Risk and Uncertainty; C1; E3; Q1;

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture

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