Commodity Trade in Continuous Time, Long-Term Availability and Storage Capacity

Andrey Vavilov () and Georgy Trofimov ()
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Andrey Vavilov: Institute for Financial Studies
Georgy Trofimov: Institute for Financial Studies

Chapter Chapter 8 in Natural Resource Pricing and Rents, 2021, pp 197-221 from Springer

Abstract: Abstract The canonical model of competitive storage is formulated in discrete time, and this brings about a high non-linearity and computational complexity of equilibrium equations. In this chapter, we consider a continuous-time commodity market model utilizing the advantages of stochastic calculus that make this model a more convenient analysis tool. It is shown that the argument of the equilibrium price function is the long-term availability of a commodity instead of the current availability, which does not make sense for continuous time. The equilibrium price function satisfies a second-order differential equation and is given by the saddle path under the standard boundary conditions for switching between the regimes of commodity trade. We refine these conditions for the model extension with an upper-boundary constraint on storage capacity and examine the structure of equilibrium price functions in this case.

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:spr:conchp:978-3-030-76753-2_8

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DOI: 10.1007/978-3-030-76753-2_8

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