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Commodity Markets, Price Limiters and Speculative Price Dynamics

We develop a behavioral commodity market model with consumers, producers and heterogeneous speculators to characterize the nature of commodity price fluctuations and to explore the efectiveness of price stabilization schemes. Within our model, nonlinear interactions between market participants can create either bull or bear markets, or irregular price fluctuations between bulland bear markets. Both the imposition of a bottoming price level (to support producers) or a topping price level (to protect consumers) can reduce market price volatility. However, simple policy rules, such as price limiters, may have unexpected consequences in a complex environment: a minimum price level decreases the average price while a maximum price limit increases the average price. In addition, price limiters influence the price dynamics in an intricate way and may cause volatility clustering.

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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 136.

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Length: 22 pages
Date of creation: 01 Oct 2004
Date of revision:
Publication status: Published as: He, X. and Westerhoff, F. H., 2005, "Commodity Markets, Price Limiters and Speculative Price Dynamics", Journal of Economic Dynamics and Control, 29(9), 1577-1596.
Handle: RePEc:uts:rpaper:136
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