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The Economics of Food Price Volatility$
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Jean-Paul Chavas, David Hummels, and Brian D. Wright

Print publication date: 2014

Print ISBN-13: 9780226128924

Published to Chicago Scholarship Online: May 2015

DOI: 10.7208/chicago/9780226129082.001.0001

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

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

Chapter:
(p.193) 5 Bubble Troubles? Rational Storage, Mean Reversion, and Runs in Commodity Prices
Source:
The Economics of Food Price Volatility
Author(s):

Eugenio S. A. Bobenrieth

Juan R. A. Bobenrieth

Brian D. Wright

Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226129082.003.0006

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

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