Explaining the Persistence of Commodity Prices

Serena Ng () and Francisco Ruge-Murcia

Cahiers de recherche from Universite de Montreal, Departement de sciences economiques

Abstract: This paper extends the Competitive Storage Model by incorporating prominent features of the production process and financial markets. A major limitation of this basic model is that it cannot successfully explain the degree of serial correlation observed in actual data. The proposed extensions build on the observation that in order to generate a high degree of price persistence, a model must incorporate features such that agents are willing to hold stocks more often than predicted by the basic model. We therefore allow unique characteristics of the production and trading mechanisms to provide the required incentives. Specifically, the proposed models introduce (i) gestation lags in production with heteroskedastic supply shocks, (ii) multiperiod forward contracts, and (iii) a convenience return to inventory holding. The rational expectations solutions for twelve commodities are numerically solved. Simulations are then employed to assess the effects of the above extensions on the time series properties of commodity prices. Results indicate that each of the features above partially account for the persistence and occasional spikes observed in actual data. Evidence is presented that the precautionary demand for stocks might play a substantial role in the dynamics of commodity prices.

Keywords: nonlinear models; rsistence; gestation lags; convenience yield; ecautionary demand (search for similar items in EconPapers)
JEL-codes: E44 E47 (search for similar items in EconPapers)
Pages: 27 pages
Date: 1997
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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http://hdl.handle.net/1866/446 (application/pdf)

Related works:
Journal Article: Explaining the Persistence of Commodity Prices (2000)
Working Paper: Explaining the Persistence of Commodity Prices (1997)
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Persistent link: https://EconPapers.repec.org/RePEc:mtl:montde:9709

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