Hostname: page-component-76fb5796d-2lccl Total loading time: 0 Render date: 2024-04-26T01:15:46.216Z Has data issue: false hasContentIssue false
  • English
  • Français

The Supply of Storage under Heterogeneous Expectations

Published online by Cambridge University Press:  28 April 2015

Darren L. Frechette
Darren L. Frechette*
Affiliation:
Department of Agricultural Economics and Rural Sociology, Pennsylvania State University, University Park, Pennsylvania
Get access

Abstract

Expected prices for storable commodities often lie below spot prices plus interest and marginal storage charges. Recently this gap has been explained as the value of a call option held by a representative storer whenever a positive probability exists that stocks could dwindle to zero. However, the probability of an aggregate stock-out is effectively zero in most markets most of the time. This paper presents an alternative model that explains the gap as an equilibrium between fundamentals traders and noise traders. Applications of the model suggest that rational agents make up 84 percent of the U.S. copper market, and more than 95 percent of the corn and wheat markets.

Keywords

storageheterogeneous expectationsnoise traders
Type
Articles
Information
Journal of Agricultural and Applied Economics , Volume 31 , Issue 3 , December 1999 , pp. 461 - 474
Copyright
Copyright © Southern Agricultural Economics Association 1999

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Benirschka, M. and Binkley, J. “Optimal Storage and Marketing over Space and Time.” American Journal of Agricultural Economics 77(1995):512–524.CrossRefGoogle Scholar
Black, F. “Noise” in Thaler, R. H. (ed) Advances in Behavioral Finance. NY: Russell Sage Foundation, p.3–22, 1993.Google Scholar
Brennan, M.J. “The Supply of Storage.” American Economic Review 48(1958):50–72.Google Scholar
Brennan, M.J. “The Price of Convenience and the Valuation of Commodity Contingent Claims” in D. Lund, and B. Oskendal, (eds) Stochastic Models and Option Values. NY: North-Holland, p33–71, 1991.Google Scholar
Brennan, D., Williams, J. and Wright, B.D. “Convenience Yield without the Convenience: A Spatial-Temporal Interpretation of Storage under Backwardation.” Economic Journal 107(1997): 1009–1022.CrossRefGoogle Scholar
Chavas, J.-P. “On the Economic Rationality of Market Participants: The Case of Expectations in the U.S. Pork Market.” Journal of Agricultural and Resource Economics 24,1(1999):19–37.Google Scholar
Cutler, D.M., Poterba, J.M., and Summers, L.H. “Speculative Dynamics and the Role of Feedback Traders.” American Economic Review 80(1989):63–68.Google Scholar
Day, R.H.Complex Economic Dynamics, vol. I. Cambridge, MA: MIT Press, 1994.Google Scholar
Deaton, A. and Laroque, G. “On the Behaviour of Commodity Prices.” Review of Economic Studies 59(1992): 1–23.CrossRefGoogle Scholar
Deaton, A. and Laroque, G. “Competitive Storage and Commodity Price Dynamics.” Journal of Political Economy 104(1996):896–923.CrossRefGoogle Scholar
De Long, J.B., Shleifer, A., Summers, L., and Waldmann, R.J. “Noise Trader Risk in Financial Markets” in Thaler, Richard H. (ed) Advances in Behavioral Finance. NY: Russell Sage Foundation, p23–58, 1993.Google Scholar
Foster, K.A. and Mwanaumo, A. “Estimation of Dynamic Maize Supply Response in Zambia.” Agricultural Economics 12(1995):99–107.CrossRefGoogle Scholar
Frankel, J.A. and Froot, K.A. “Understanding the Dollar in the Eighties: The Expectations of Chartists and Fundamentalists.” Economic Record (1986):24–38.Google Scholar
Frankel, J.A. and Froot, K.A. “Chartists, Fundamentalists, and Trading in the Foreign Exchange Market.” American Economic Review 81,2(1990): 181–185.Google Scholar
Frechette, D.L.Three Essays Concerning Commodity Storage under Rational Expectations. Ph.D. dissertation. Raleigh: North Carolina State University, 1996.Google Scholar
Frechette, D.L. and Fackler, P.L. (1999): “Agricultural Marketing on the Space-Time Continuum.” American Journal of Agricultural Economics 81,4 (1999).Google Scholar
Heinkel, R., Howe, M.E., and Hughes J.S. (1990): “Commodity Convenience Yields as an Option Profit.” Journal of Futures Markets 10(1990): 519–533.CrossRefGoogle Scholar
Irwin, S. H. and Thraen, C.S. “Rational Expectations in Agriculture? A Review of the Issues and the Evidence.” Review of Agricultural Economics 16(1994):133–158.CrossRefGoogle Scholar
Kaldor, N. “Speculation and Economic Stability.” Review of Economic Studies 7(1939): 1–27.CrossRefGoogle Scholar
Keynes, J.M.A Treatise on Money, vol. II. NY: Harcourt, 1930.Google Scholar
Lintner, J. “The Valuation of Risky Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets.” Review of Economics and Statistics 47(1965): 13–37.CrossRefGoogle Scholar
Lintner, J. “The Aggregation of Investors' Diverse Judgement and Preferences in Purely Competitive Securities Markets.” Journal of Financial and Quantitative Analysis 4(1969):347–400.CrossRefGoogle Scholar
Milonas, N.T. and Thomadakis, S.B. “Convenience Yields as Call Options: An Empirical Analysis.” Journal of Futures Markets 17(1997):1–15.3.0.CO;2-P>CrossRefGoogle Scholar
Miranda, Mario J. “Numerical Strategies for Solving the Nonlinear Rational Expectations Commodity Market Model.” Computational Economics 11,1-2(1998:71–87.CrossRefGoogle Scholar
Nerlove, M. and Fornati, I. “Quasi-Rational Expectations, An Alternative to Fully Rational Expectations: An Application to U.S. Beef Cattle Supply.” Journal of Econometrics 83,1-2(1998): 129–161.CrossRefGoogle Scholar
Nerlove, M., Grether, D.M., and Carvalho, J.L.Analysis of Economic Time Series: A Synthesis. NY: Academic Press, 1979Google Scholar
Pindyck, R.S. “Inventories and the Short-Run Dynamics of Commodity Prices.” RAND Journal of Economics 25(1994): 141–159.CrossRefGoogle Scholar
Samuelson, P.A. “Stochastic Speculative Price.” Proceedings of the National Academy of Sciences 68(1971):335–337.CrossRefGoogle ScholarPubMed
Sanders, D.R., Irwin, S.H., and Leuthold, R.M. “Noise Trader Demand in Commodity Futures Markets.” NCR-134 Conference Proceedings, p. 12–23, 1996.Google Scholar
Sharpe, W.F. “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk.” Journal of Finance 19(1964):425–442.Google Scholar
Susmel, R. and Thompson, A. “Volatility, Storage and Convenience Yield: Evidence from Natural Gas Markets.” Journal of Futures Markets 17(1997): 17–43.3.0.CO;2-J>CrossRefGoogle Scholar
Telser, L.G. “Futures Trading and the Storage of Cotton and Wheat.” Journal of Political Economy 64(1958):233–255.CrossRefGoogle Scholar
Thijssen, G. “Supply Response and Dynamic Factor Demand of Dutch Dairy Farms.” European Review of Agricultural Economics 21,2(1994): 241–258.CrossRefGoogle Scholar
Thurman, W.N. “Speculative Carryover: An Empirical Examination of the U.S. Refined Copper Market.” RAND Journal of Economics 19(1988):420–437.CrossRefGoogle Scholar
Tomek, W.G. and Gray, R.W. “Temporal Relationships Among Prices on Commodity Futures Markets: Their Allocative and Stabilizing Roles.” American Journal of Agricultural Economics 52(1970):372–380.CrossRefGoogle Scholar
U.S. Department of Commerce. Survey of Current Business. Washington: U.S. Department of Commerce, various issues.Google Scholar
White, F.C. and Shideed, K.H. “Structural Change in Supply Response Analysis of Corn Acreage.” Review of Agricultural Economics 13(1991):237–248.CrossRefGoogle Scholar
Williams, J.C. and Wright, B.D.Storage and Commodity Markets. NY: Cambridge University Press, 1991.CrossRefGoogle Scholar
Winter-Nelson, A. “Expectations, Supply Response, and Marketing Boards: An Example from Kenya.” Agricultural Economics 14(1996):21–32.CrossRefGoogle Scholar
Wright, B.D. and Williams, J.C. “A Theory of Negative Prices for Storage.” Journal of Futures Markets 9(1989): 1–13.CrossRefGoogle Scholar
Working, H. “Theory of the Inverse Carrying Charge in Futures Markets.” Journal of Farm Economics 30(1948): 1–28.CrossRefGoogle Scholar
Working, H. “The Theory of Price of Storage.” American Economic Review 39(1949): 1254–1262.Google Scholar
Zellner, A. and Theil, H. “Three Stage Least Squares: Simultaneous Estimation of Simultaneous Equations.” Econometrica 30(1962):63–68.CrossRefGoogle Scholar
Zulauf, C., Irwin, S.H., Ropp, J., and Sberna, A. “A Reappraisal of the Forecasting Performance of Corn and Soybean New Crop Futures.” NCR-134 Conference Proceedings, p.377–387, 1996.Google Scholar