Explaining the Persistence of Commodity Prices

Serena Ng () and Francisco Ruge-Murcia

Computational Economics, 2000, vol. 16, issue 1/2, 149-171

Abstract: This paper extends the Competitive Storage Model by incorporating prominent features of the production process and financial markets. This extension seems necessary since the basic model does not successfully explain the degree of serial correlation observed in actual data. To generate a high degree of price persistence, the model must incorporate agents that are willing to hold stocks more often than predicted by the basic model, so we include characteristics of the production and trading mechanisms to provide the required incentives. Specifically, we introduce (i) gestation lags in production with heteroskedastic supply shocks, (ii) multiperiod forward contracts, and (iii) a convenience return to inventory holding. Rational expectations solutions for twelve commodities are solved numerically. Simulations are then used to assess the effects of these extensions on the time-series properties of commodity prices. The results indicate that each feature accounts partly for the persistence as well as the occasional spikes observed in actual data. Evidence is also presented that the precautionary demand for stocks might play a substantial role in the dynamics of commodity prices.

Keywords: commodity prices; persistence; speculative storage (search for similar items in EconPapers)
Date: 2000
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Related works:
Working Paper: Explaining the Persistence of Commodity Prices (1997)
Working Paper: Explaining the Persistence of Commodity Prices (1997)
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