IDEAS home Printed from https://ideas.repec.org/p/nzb/nzbdps/2007-05.html
   My bibliography  Save this paper

A model of spatial arbitrage with transport capacity constraints and endogenous transport prices

Author

Listed:

Abstract

This article solves a high frequency model of price arbitrage incorporating storage and trade when the amount of trade is limited by transport capacity constraints. In equilibrium there is considerable variation in transport costs, because transport costs rise when the demand to ship goods exceeds the capacity limit. This variation is necessary to attract shipping capacity into the industry. In turn, prices in different locations differ by a time varying amount. Thus while the law of one price holds, it holds because of endogenous variation in transport costs.

Suggested Citation

  • Andrew Coleman, 2007. "A model of spatial arbitrage with transport capacity constraints and endogenous transport prices," Reserve Bank of New Zealand Discussion Paper Series DP2007/05, Reserve Bank of New Zealand.
  • Handle: RePEc:nzb:nzbdps:2007/05
    as

    Download full text from publisher

    File URL: http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Discussion%20papers/2007/dp07-05.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399, October.
    2. Angus Deaton & Guy Laroque, 1992. "On the Behaviour of Commodity Prices," Review of Economic Studies, Oxford University Press, vol. 59(1), pages 1-23.
    3. B. L. Gardner & G. C. Rausser (ed.), 2001. "Handbook of Agricultural Economics," Handbook of Agricultural Economics, Elsevier, edition 1, volume 1, number 2.
    4. Spiller, Pablo T. & Wood, Robert O., 1988. "The estimation of transaction costs in arbitrage models," Journal of Econometrics, Elsevier, vol. 39(3), pages 309-326, November.
    5. Andrew Coleman, 2004. "Storage, Slow Transport, and the Law of One Price: Evidence from the Nineteenth Century U.S. Corn Market," Working Papers 502, Research Seminar in International Economics, University of Michigan.
    6. Barry K. Goodwin & Thomas J. Grennes & Michael K. Wohlgenant, 1990. "A Revised Test of the Law of One Price Using Rational Price Expectations," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 72(3), pages 682-693.
    7. Bob Baulch, 1997. "Transfer Costs, Spatial Arbitrage, and Testing for Food Market Integration," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 477-487.
    8. Fackler, Paul L. & Goodwin, Barry K., 2001. "Spatial price analysis," Handbook of Agricultural Economics, in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 1, chapter 17, pages 971-1024, Elsevier.
    9. Martin Benirschka & James K. Binkley, 1995. "Optimal Storage and Marketing Over Space and Time," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(3), pages 512-524.
    10. B. L. Gardner & G. C. Rausser (ed.), 2001. "Handbook of Agricultural Economics," Handbook of Agricultural Economics, Elsevier, edition 1, volume 1, number 1.
    11. Unknown, 1926. "Price Spreads and Shipment Costs in the Wheat Export Trade of Canada," Wheat Studies, Stanford University, Food Research Institute, vol. 2(05), pages 1-30, March.
    12. Brennan, Donna & Williams, Jeffrey & Wright, Brian D, 1997. "Convenience Yield without the Convenience: A Spatial-Temporal Interpretation of Storage under Backwardation," Economic Journal, Royal Economic Society, vol. 107(443), pages 1009-1022, July.
    13. 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.
    14. Christopher B. Barrett & Jau Rong Li, 2002. "Distinguishing between Equilibrium and Integration in Spatial Price Analysis," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(2), pages 292-307.
    15. Gustafson, Robert L., 1958. "Carryover levels for grains: A method for determining amounts that are optimal under specified conditions," Technical Bulletins 157231, United States Department of Agriculture, Economic Research Service.
    16. Darren L. Frechette & Paul L. Fackler, 1999. "What Causes Commodity Price Backwardation?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(4), pages 761-771.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Andrew Coleman, 2007. "The pitfalls of estimating transactions costs from price data: evidence from trans-Atlantic gold-point arbitrage, 1886-1905," Reserve Bank of New Zealand Discussion Paper Series DP2007/07, Reserve Bank of New Zealand.
    2. Kornher, Lukas & Kalkuhl, Matthias, 2013. "Food Price Volatility in Developing Countries and its Determinants," Quarterly Journal of International Agriculture, Humboldt-Universitaat zu Berlin, vol. 52(4), pages 1-32, November.
    3. Christophe Gouel, 2012. "Agricultural Price Instability: A Survey Of Competing Explanations And Remedies," Journal of Economic Surveys, Wiley Blackwell, vol. 26(1), pages 129-156, February.
    4. Isaac Abunyuwah & Henry De-Graft Acquah, 2013. "Modelling non-linear Spatial Market Integration and Equilibrium Processes in Hidden Markov Framework," Journal of Economics and Behavioral Studies, AMH International, vol. 5(8), pages 535-545.
    5. Van Campenhout, Bjorn, 2007. "Modelling trends in food market integration: Method and an application to Tanzanian maize markets," Food Policy, Elsevier, vol. 32(1), pages 112-127, February.
    6. Christophe Gouel, 2013. "Comparing Numerical Methods for Solving the Competitive Storage Model," Computational Economics, Springer;Society for Computational Economics, vol. 41(2), pages 267-295, February.
    7. Nicolas Legrand, 2019. "The Empirical Merit Of Structural Explanations Of Commodity Price Volatility: Review And Perspectives," Journal of Economic Surveys, Wiley Blackwell, vol. 33(2), pages 639-664, April.
    8. Cesar Revoredo, 2000. "On The Solution Of The Dynamic Rational Expectations Commodity Storage Model In The Presence Of Stockholding By Speculators And Processors," Computing in Economics and Finance 2000 42, Society for Computational Economics.
    9. Andrew Coleman, 2008. "Storage Under Backwardation: A Direct Test of the Wright-Williams Conjecture," Working Papers 08_13, Motu Economic and Public Policy Research.
    10. Tran, A. Nam & Welch, Jarrod R. & Lobell, David & Roberts, Michael J. & Schlenker, Wolfram, 2012. "Commodity Prices and Volatility in Response to Anticipated Climate Change," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124827, Agricultural and Applied Economics Association.
    11. Brian D. Wright, 2012. "International Grain Reserves And Other Instruments to Address Volatility in Grain Markets," The World Bank Research Observer, World Bank Group, vol. 27(2), pages 222-260, August.
    12. Sekhar, C.S.C., 2012. "Agricultural market integration in India: An analysis of select commodities," Food Policy, Elsevier, vol. 37(3), pages 309-322.
    13. Colin A. Carter & Gordon C. Rausser & Aaron Smith, 2011. "Commodity Booms and Busts," Annual Review of Resource Economics, Annual Reviews, vol. 3(1), pages 87-118, October.
    14. Larson, Donald F. & Sarris, Alexander, 2009. "The performance of Bulgarian food markets during reform," Policy Research Working Paper Series 4876, The World Bank.
    15. Rezitis, Anthony N. & Pachis, Dimitris N., 2013. "Investigating the Price Transmission Mechanism of the Greek Fresh Tomato Market with a Markov Switching Vector Error Correction model," Agricultural Economics Review, Greek Association of Agricultural Economists, vol. 14(2), pages 1-17.
    16. Brockhaus, Jan & Kalkuhl, Matthias & Kozicka, Marta, 2016. "What Drives India’s Rice Stocks? Empirical Evidence," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235659, Agricultural and Applied Economics Association.
    17. Roberts, Michael J. & Tran, A. Nam, 2013. "Conditional Suspension of the US Ethanol Mandate using Threshold Price inside a Competitive Storage Model," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150717, Agricultural and Applied Economics Association.
    18. Frechette, Darren L., 1999. "The Supply Of Storage Under Heterogeneous Expectations," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 31(3), pages 1-14, December.
    19. Evans, Lewis & Guthrie, Graeme, 2007. "Commodity Price Behavior With Storage Frictions," Working Paper Series 3966, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    20. Donald F. Larson & Julian Lampietti & Christophe Gouel & Carlo Cafiero & John Roberts, 2014. "Food Security and Storage in the Middle East and North Africa," The World Bank Economic Review, World Bank Group, vol. 28(1), pages 48-73.

    More about this item

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • N71 - Economic History - - Economic History: Transport, International and Domestic Trade, Energy, and Other Services - - - U.S.; Canada: Pre-1913
    • L92 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Railroads and Other Surface Transportation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nzb:nzbdps:2007/05. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/rbngvnz.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Reserve Bank of New Zealand Knowledge Centre (email available below). General contact details of provider: https://edirc.repec.org/data/rbngvnz.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.