Chapter

Bubble Troubles? Rational Storage, Mean Reversion, and Runs in Commodity Prices

Eugenio S. A. Bobenrieth, Juan R. A. Bobenrieth and Brian D. Wright

in The Economics of Food Price Volatility

Published by University of Chicago Press

Published in print October 2014 | ISBN: 9780226128924
Published online May 2015 | e-ISBN: 9780226129082 | DOI: https://dx.doi.org/10.7208/chicago/9780226129082.003.0006
Bubble Troubles? Rational Storage, Mean Reversion, and Runs in Commodity Prices

More Like This

Show all results sharing this subject:

  • Economic Development and Growth

GO

Show Summary Details

Preview

High and volatile prices of major commodities have generated a wide array of analyses and policy prescriptions, including influential studies identifying price bubbles in periods of high volatility. Here we consider a model of the market for a storable commodity in which price expectations are unbounded. We derive its implications for price time series and empirical tests of price behavior. In this model commodity price is equal to marginal consumption value, and hence bubbles as defined in financial economics cannot occur. However the model generates episodes of price runs that could be characterized as “explosive” and might seem to be bubble-like. At sufficiently long holding periods, a price path can yield average returns consistent with mean reversion, even though the long run expectation of price is infinite.

Keywords: storable commodity; price expectation; time series; behaviour; marginal consumption value; price bubbles; identifying

Chapter.  7744 words.  Illustrated.

Subjects: Economic Development and Growth

Full text: subscription required

How to subscribe Recommend to my Librarian

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content. subscribe or login to access all content.