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Estimating the competitive storage model with trending commodity prices

Listed author(s):
  • Christophe Gouel
  • Nicolas Legrand

We present a method to estimate jointly the parameters of a standard commodity storage model and the parameters characterizing the trend in commodity prices. This procedure allows the influence of a possible trend to be removed without restricting the model specification, and allows model and trend selection based on statistical criteria. The trend is modeled deterministically using linear or cubic spline functions of time. The results show that storage models with trend are always preferred to models without trend. They yield more plausible estimates of the structural parameters, with storage costs and demand elasticities that are more consistent with the literature. They imply occasional stockouts, whereas without trend the estimated models predict no stockouts over the sample period for most commodities. Moreover, accounting for a trend in the estimation imply price moments closer to those observed in commodity prices. Our results support the empirical relevance of the speculative storage model, and show that storage model estimations should not neglect the possibility of long-run price trends.

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File URL: http://ns212578.ovh.net/RePEc/cec/wpaper/15-11-Cahier-R-2015-13-Gouel-Legrand.pdf
File Function: First version, 2015
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Paper provided by Chaire Economie du Climat in its series Working Papers with number 1513.

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Length: 40 pages
Date of creation: 2015
Handle: RePEc:cec:wpaper:1513
Contact details of provider: Web page: http://ns212578.ovh.net

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