NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

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


This chapter is a preliminary draft unless otherwise noted. It may not have been subjected to the formal review process of the NBER. This page will be updated as the chapter is revised.

Chapter in forthcoming NBER book The Economics of Food Price Volatility, Jean-Paul Chavas, David Hummels, and Brian Wright
Conference held August 15-16, 2012
Forthcoming from University of Chicago Press

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.

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This paper was revised on May 20, 2013

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This chapter first appeared as NBER working paper w19037, Bubble Troubles? Rational Storage, Mean Reversion and Runs in Commodity Prices., Eugenio S. A. Bobenrieth, Juan R. A. Bobenrieth, Brian D. Wright
Commentary on this chapter: Comment, Jock R. Anderson
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