Old crop versus new crop prices: Explaining the correlation
Francisco Arroyo Marioli
Journal of Futures Markets, 2020, vol. 40, issue 7, 1192-1208
Although competitive storage theory has proven successful in explaining many patterns for commodity prices, some features are not understood. While standard models predict low correlation between future prices with delivery dates before and after the harvest, the data suggest otherwise. To correct this, I assume that harvests appear continuously rather than at a single moment. This addition to the standard model allows me to link preharvest and postharvest markets to the same source of supply, and hence obtain the empirically observed high correlation. Empirical evidence also suggests that my assumptions are realistic. Results are robust to different parameter specifications.
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