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Informational Frictions and Commodity Markets

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  • MICHAEL SOCKIN
  • WEI XIONG

Abstract

type="main"> This paper develops a model with a tractable log-linear equilibrium to analyze the effects of informational frictions in commodity markets. By aggregating dispersed information about the strength of the global economy among goods producers whose production has complementarity, commodity prices serve as price signals to guide producers' production decisions and commodity demand. Our model highlights important feedback effects of informational noise originating from supply shocks and futures market trading on commodity demand and spot prices. Our analysis illustrates the weakness common in empirical studies on commodity markets of assuming that different types of shocks are publicly observable to market participants.

Suggested Citation

  • Michael Sockin & Wei Xiong, 2015. "Informational Frictions and Commodity Markets," Journal of Finance, American Finance Association, vol. 70(5), pages 2063-2098, October.
    • Handle: RePEc:bla:jfinan:v:70:y:2015:i:5:p:2063-2098
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    File URL: http://hdl.handle.net/10.1111/jofi.12261
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