On The Behavior Of Commodity Prices
This paper applies the standard rational expectations competitive storage model to the study of thirteen commodities. It explains the skewness and the existence of rare, but violent, explosions in prices coupled with a high degree of price autocorrelation in more normal times. A feature of the model is the recognition of the fact that it is impossible for the market to carry negative inventories, this introduces nonlinearity which carries through into nonlinearity of the predicted commodity price series. For most of the prices, their behavior conforms to the predictions of the theory about conditional expectations and conditional variances. Copyright 1992 by The Review of Economic Studies Limited.
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