A stochastic optimal stopping model for storable commodity prices

Nader Karimi, Erfan Salavati, Hirbod Assa and Hojatollah Adibi

Statistics & Probability Letters, 2024, vol. 204, issue C

Abstract: In this paper, we propose a continuous time version of the well-known speculative storage model for commodity prices. But from the mathematical point of view this is not a trivial extension and needs careful consideration of the theory of stochastic stopping time combined with fixed point theory. We formulate the problem in a manner that the main objective of the storage model, known as the stationary rational expectations equilibrium (SREE), becomes a fixed-point of an operator which solves a free boundary problem and show that this operator under some conditions is a contraction. We also demonstrate the benefits of our continuous time model through a numerical algorithm.

Keywords: Optimal stopping; Stochastic differential equation; Equilibrium; Fixed point (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1016/j.spl.2023.109941

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