Economics at your fingertips  

On the behavior of commodity prices when speculative storage is bounded

Atle Oglend and Tore Kleppe ()

Journal of Economic Dynamics and Control, 2017, vol. 75, issue C, 52-69

Abstract: This paper investigates the implications of bounded speculative storage, storage bounded from below at zero and above at a capacity, on commodity prices. Binding capacity mirrors the non-negativity constraint on storage and leads to negative price spiking and higher volatility when the market is in deep contango, i.e. low current prices at high stock levels. With bounded storage there is no need to restrict storage to be costly to ensure a rational expectations equilibrium. This allows the model to cover a wide range of storage technologies, including free and productive storage. We also provide an alternative expression for speculative prices that highlights the key role of the storage boundaries. The competitive equilibrium price is the sum of discounted future probability weighted boundary prices. The boundary prices can be viewed as dividends on commodities in storage reflecting the realization of economic profits from storage.

Keywords: Q02; Q11; Keywords:; Commodity prices; Storage; Capacity; Rational expectations (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

Page updated 2019-09-19
Handle: RePEc:eee:dyncon:v:75:y:2017:i:c:p:52-69