An Empirical Model of Inventory Investment by Durable Commodity Intermediaries

George Hall and John Rust ()

Macroeconomics from University Library of Munich, Germany

Abstract: We present a new detailed data set of high-frequency observations on inventory investment by a U.S. steel wholesaler. Our analysis of the data leads to six main conclusions: orders and sales are made infrequently; orders are more volatile than sales; order sizes vary considerably; there is considerable day-to-day variability in sales prices; inventory/sales ratios are unstable; and there are occasional stockouts. We model the firm generically as a durable commodity intermediary. We demonstrate that the firm's behavior at the product level is well approximated by an optimal trading strategy derived from a multi-dimensional nonlinear dynamic programming problem with continuous state and control variables which are subject to frequently binding inequality constraints. We show that the optimal trading strategy takes the form of a generalized (S,s) rule in which the (S,s) bands are decreasing functions of the spot price. We simulate a calibrated version of this model, and show that the simulated data exhibit the key features of inventory investment we observe in our data.

JEL-codes: H5 (search for similar items in EconPapers)
Pages: 40 pages
Date: 1999-04-12
Note: TeX file, Postscript version submitted, 40 pages
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: An empirical model of inventory investment by durable commodity intermediaries (2000)
Working Paper: An Empirical Model of Inventory Investment by Durable Commodity Intermediaries (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:9904005

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