Bubble Troubles? Rational Storage, Mean Reversion, and Runs in Commodity Prices
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.
-
-
Copy CitationEugenio S. A. Bobenrieth, Juan R. A. Bobenrieth, and Brian D. Wright, The Economics of Food Price Volatility (University of Chicago Press, 2014), chap. 5, https://www.nber.org/books-and-chapters/economics-food-price-volatility/bubble-troubles-rational-storage-mean-reversion-and-runs-commodity-prices.Download Citation
-
Published From Paper
More from the NBER
In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter, the NBER Digest, the Bulletin on Health, and the Bulletin on Entrepreneurship — as well as online conference reports, video lectures, and interviews.
