IDEAS home Printed from https://ideas.repec.org/p/hal/journl/hal-01924388.html
   My bibliography  Save this paper

The Empirical Merit of Structural Explanations of Commodity Price Volatility: Review and Perspectives

Author

Listed:
  • Nicolas Legrand

    (SMART-LERECO - Structures et Marché Agricoles, Ressources et Territoires - INRA - Institut National de la Recherche Agronomique - AGROCAMPUS OUEST)

Abstract

This paper presents both the history of and state‐of‐the‐art in empirical modeling approaches to the world commodity price volatility. The analysis builds on the storage model and key milestones in its development. Specifically, it is intended to offer a reader unfamiliar with the relevant literature an insight into the modeling issues at stake from both a historical and speculative viewpoint. The review considers primarily the empirical techniques designed to assess the merits of the storage theory; it does not address purely statistical approaches that do not rely on storage theory and that have been studied in depth in other streams of the commodity price literature. The paper concludes with some suggestions for future research to try to resolve some of the existing empirical flaws, and hopefully to increase the explanatory power of the storage model.

Suggested Citation

  • Nicolas Legrand, 2019. "The Empirical Merit of Structural Explanations of Commodity Price Volatility: Review and Perspectives," Post-Print hal-01924388, HAL.
    • Handle: RePEc:hal:journl:hal-01924388
    DOI: 10.1111/joes.12291
    Note: View the original document on HAL open archive server: https://hal.science/hal-01924388
    as

    Download full text from publisher

    File URL: https://hal.science/hal-01924388/document
    Download Restriction: no
    File URL: https://libkey.io/10.1111/joes.12291?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ing-Haw Cheng & Wei Xiong, 2014. "Financialization of Commodity Markets," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 419-441, December.
    2. Robert S. Pindyck & Julio J. Rotemberg, 1993. "The Comovement of Stock Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(4), pages 1073-1104.
    3. Browne, Frank & Cronin, David, 2010. "Commodity prices, money and inflation," Journal of Economics and Business, Elsevier, vol. 62(4), pages 331-345, July.
    4. Duffie, Darrell & Singleton, Kenneth J, 1993. "Simulated Moments Estimation of Markov Models of Asset Prices," Econometrica, Econometric Society, vol. 61(4), pages 929-952, July.
    5. Carlo Cafiero & Eugenio S.A. Bobenrieth H. & Juan R.A. Bobenrieth H. & Brian D. Wright, 2015. "Maximum Likelihood Estimation of the Standard Commodity Storage Model: Evidence from Sugar Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 97(1), pages 122-136.
    6. Bordo, Michael David, 1980. "The Effects of Monetary Change on Relative Commodity Prices and the Role of Long-Term Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(6), pages 1088-1109, December.
    7. Yu-Chin Chen & Kenneth S. Rogoff & Barbara Rossi, 2010. "Can Exchange Rates Forecast Commodity Prices?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(3), pages 1145-1194.
    8. Inoue, Atsushi & Kilian, Lutz, 2013. "Inference on impulse response functions in structural VAR models," Journal of Econometrics, Elsevier, vol. 177(1), pages 1-13.
    9. V. Ernesto Alex Guerra & Eugenio Sebastián Antonio Bobenrieth H. & Juan Rodrigo Andrés Bobenrieth H. & Carlo Cafiero, 2015. "Editor's choice Empirical commodity storage model: the challenge of matching data and theory," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 42(4), pages 607-623.
    10. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399, January.
    11. Canova, Fabio, 2014. "Bridging DSGE models and the raw data," Journal of Monetary Economics, Elsevier, vol. 67(C), pages 1-15.
    12. Ghoshray, Atanu, 2011. "A reexamination of trends in primary commodity prices," Journal of Development Economics, Elsevier, vol. 95(2), pages 242-251, July.
    13. Wright, Brian D & Williams, Jeffrey C, 1982. "The Economic Role of Commodity Storage," Economic Journal, Royal Economic Society, vol. 92(367), pages 596-614, September.
    14. Serena Ng & Francisco J. Ruge-Murcia, 2000. "Explaining the Persistence of Commodity Prices," Computational Economics, Springer;Society for Computational Economics, vol. 16(1/2), pages 149-171, October.
    15. Gallant, A. Ronald & Tauchen, George, 1996. "Which Moments to Match?," Econometric Theory, Cambridge University Press, vol. 12(4), pages 657-681, October.
    16. Brian D. Wright & Jeffrey C. Williams, 1984. "The Welfare Effects of the Introduction of Storage," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(1), pages 169-192.
    17. Joseph P Janzen & Aaron Smith & Colin A Carter, 2018. "Commodity Price Comovement and Financial Speculation: The Case of Cotton," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(1), pages 264-285.
    18. Dvir, Eyal & Rogoff, Kenneth, 2014. "Demand effects and speculation in oil markets: Theory and evidence," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 113-128.
    19. Cafiero, Carlo & Bobenrieth H., Eugenio S.A. & Bobenrieth H., Juan R.A. & Wright, Brian D., 2011. "The empirical relevance of the competitive storage model," Journal of Econometrics, Elsevier, vol. 162(1), pages 44-54, May.
    20. Christophe Gouel, 2013. "Comparing Numerical Methods for Solving the Competitive Storage Model," Computational Economics, Springer;Society for Computational Economics, vol. 41(2), pages 267-295, February.
    21. Ng, Serena, 1996. "Looking for evidence of speculative stockholding in commodity markets," Journal of Economic Dynamics and Control, Elsevier, vol. 20(1-3), pages 123-143.
    22. Angus Deaton & Guy Laroque, 1992. "On the Behaviour of Commodity Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(1), pages 1-23.
    23. Stephan Pfaffenzeller & Paul Newbold & Anthony Rayner, 2007. "A Short Note on Updating the Grilli and Yang Commodity Price Index," The World Bank Economic Review, World Bank, vol. 21(1), pages 151-163.
    24. Laura L. Veldkamp, 2006. "Information Markets and the Comovement of Asset Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(3), pages 823-845.
    25. Frankel, Jeffrey A., 2014. "Effects of speculation and interest rates in a “carry trade” model of commodity prices," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 88-112.
    26. Wright, Brian, 2014. "Global Biofuels: Key to the Puzzle of Grain Market Behavior," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt11715438, Department of Agricultural & Resource Economics, UC Berkeley.
    27. Christophe Gouel & Nicolas Legrand, 2017. "Estimating the Competitive Storage Model with Trending Commodity Prices," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(4), pages 744-763, June.
    28. James D. Hamilton, 2009. "Understanding Crude Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 179-206.
    29. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2003. "The Unholy Trinity of Financial Contagion," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 51-74, Fall.
    30. Claudia Steinwender, 2018. "Real Effects of Information Frictions: When the States and the Kingdom Became United," American Economic Review, American Economic Association, vol. 108(3), pages 657-696, March.
    31. Harry Gorter & Dusan Drabik & David R. Just, 2015. "The Economics of Biofuel Policies," Palgrave Studies in Agricultural Economics and Food Policy, Palgrave Macmillan, number 978-1-137-41485-4, November.
    32. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
    33. Pindyck, Robert S & Rotemberg, Julio J, 1990. "The Excess Co-movement of Commodity Prices," Economic Journal, Royal Economic Society, vol. 100(403), pages 1173-1189, December.
    34. Bryan R. Routledge & Duane J. Seppi & Chester S. Spatt, 2000. "Equilibrium Forward Curves for Commodities," Journal of Finance, American Finance Association, vol. 55(3), pages 1297-1338, June.
    35. Junsoo Lee & Mark C. Strazicich, 2003. "Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1082-1089, November.
    36. Ng, Victor K & Pirrong, Stephen Craig, 1994. "Fundamentals and Volatility: Storage, Spreads, and the Dynamics of Metals Prices," The Journal of Business, University of Chicago Press, vol. 67(2), pages 203-230, April.
    37. Mordecai Ezekiel, 1938. "The Cobweb Theorem," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 52(2), pages 255-280.
    38. Gouel, Christophe & Legrand, Nicolas, 2016. "Bayesian Estimation of the Storage Model using Information on Quantities," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235599, Agricultural and Applied Economics Association.
    39. Bobenrieth H., Eugenio S.A. & Bobenrieth H., Juan R.A. & Wright, Brian D., 2008. "A foundation for the solution of consumption-saving behavior with a borrowing constraint and unbounded marginal utility," Journal of Economic Dynamics and Control, Elsevier, vol. 32(3), pages 695-708, March.
    40. Christophe Gouel, 2012. "Agricultural Price Instability: A Survey Of Competing Explanations And Remedies," Journal of Economic Surveys, Wiley Blackwell, vol. 26(1), pages 129-156, February.
    41. Michaelides, Alexander & Ng, Serena, 2000. "Estimating the rational expectations model of speculative storage: A Monte Carlo comparison of three simulation estimators," Journal of Econometrics, Elsevier, vol. 96(2), pages 231-266, June.
    42. Michael J. Roberts & Wolfram Schlenker, 2013. "Identifying Supply and Demand Elasticities of Agricultural Commodities: Implications for the US Ethanol Mandate," American Economic Review, American Economic Association, vol. 103(6), pages 2265-2295, October.
    43. Andrew Coleman, 2009. "Storage, Slow Transport, and the Law of One Price: Theory with Evidence from Nineteenth-Century U.S. Corn Markets," The Review of Economics and Statistics, MIT Press, vol. 91(2), pages 332-350, May.
    44. Brian Wright, 2014. "Global Biofuels: Key to the Puzzle of Grain Market Behavior," Journal of Economic Perspectives, American Economic Association, vol. 28(1), pages 73-98, Winter.
    45. Gourieroux, Christian & Monfort, Alain & Trognon, Alain, 1984. "Pseudo Maximum Likelihood Methods: Theory," Econometrica, Econometric Society, vol. 52(3), pages 681-700, May.
    46. Brennan, Donna & Williams, Jeffrey & Wright, Brian D, 1997. "Convenience Yield without the Convenience: A Spatial-Temporal Interpretation of Storage under Backwardation," Economic Journal, Royal Economic Society, vol. 107(443), pages 1009-1022, July.
    47. Kilian,Lutz & Lütkepohl,Helmut, 2018. "Structural Vector Autoregressive Analysis," Cambridge Books, Cambridge University Press, number 9781107196575, January.
    48. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
    49. Michael J. Roberts & Wolfram Schlenker, 2009. "World Supply and Demand of Food Commodity Calories," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1235-1242.
    50. Chambers, Marcus J & Bailey, Roy E, 1996. "A Theory of Commodity Price Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 924-957, October.
    51. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    52. Nicholas Kaldor, 1939. "Speculation and Economic Stability," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 7(1), pages 1-27.
    53. Gustafson, Robert L., 1958. "Carryover levels for grains: A method for determining amounts that are optimal under specified conditions," Technical Bulletins 157231, United States Department of Agriculture, Economic Research Service.
    54. Stacie Beck, 2001. "Autoregressive conditional heteroscedasticity in commodity spot prices," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(2), pages 115-132.
    55. Mark Lowry & Joseph Glauber & Mario Miranda & Peter Helmberger, 1987. "Pricing and Storage of Field Crops: A Quarterly Model Applied to Soybeans," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 69(4), pages 740-749.
    56. Lutz Kilian & Daniel P. Murphy, 2014. "The Role Of Inventories And Speculative Trading In The Global Market For Crude Oil," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 29(3), pages 454-478, April.
    57. Frankel, Jeffrey A & Hardouvelis, Gikas A, 1985. "Commodity Prices, Money Surprises and Fed Credibility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 425-438, November.
    58. Saghaian, Sayed H. & Hasan, Mohamad F. & Reed, Michael R., 2002. "Overshooting Of Agricultural Prices In Four Asian Economies," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 34(1), pages 1-15, April.
    59. Jeffrey A. Frankel, 1986. "Expectations and Commodity Price Dynamics: The Overshooting Model," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 68(2), pages 344-348.
    60. Theresa Osborne, 2004. "Market News in Commodity Price Theory: Application to the Ethiopian Grain Market," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(1), pages 133-164.
    61. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    62. Jeffrey A. Krautkraemer, 1998. "Nonrenewable Resource Scarcity," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 2065-2107, December.
    63. Bobenrieth H, Eugenio S A & Bobenrieth H, Juan R A & Wright, Brian D, 2004. "A Model of Supply of Storage," Economic Development and Cultural Change, University of Chicago Press, vol. 52(3), pages 605-616, April.
    64. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-1286, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Nicolas Legrand, 2023. "“The empirical relevance of the competitive storage model” by Cafiero et al. (2011): Replication, robustness, and extension," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 45(3), pages 1493-1514, September.
    2. V., Ernesto Guerra & H., Eugenio Bobenrieth & H., Juan Bobenrieth & Wright, Brian D., 2023. "Endogenous thresholds in energy prices: Modeling and empirical estimation," Energy Economics, Elsevier, vol. 121(C).
    3. Filippo Natoli, 2021. "Financialization Of Commodities Before And After The Great Financial Crisis," Journal of Economic Surveys, Wiley Blackwell, vol. 35(2), pages 488-511, April.
    4. Thomas J. Sargent & John Stachurski, 2024. "Dynamic Programming: Finite States," Papers 2401.10473, arXiv.org.
    5. Tore S. Kleppe & Atle Oglend, 2019. "Can limits‐to‐arbitrage from bounded storage improve commodity term‐structure modeling?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(7), pages 865-889, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nicolas Legrand & Christophe Gouel, 2022. "The Role of Storage in Commodity Markets: Indirect Inference Based on Grains Data," Working Papers hal-03809825, HAL.
    2. Christophe Gouel, 2012. "Agricultural Price Instability: A Survey Of Competing Explanations And Remedies," Journal of Economic Surveys, Wiley Blackwell, vol. 26(1), pages 129-156, February.
    3. V., Ernesto Guerra & H., Eugenio Bobenrieth & H., Juan Bobenrieth & Wright, Brian D., 2023. "Endogenous thresholds in energy prices: Modeling and empirical estimation," Energy Economics, Elsevier, vol. 121(C).
    4. Gouel, Christophe & Legrand, Nicolas, 2016. "Bayesian Estimation of the Storage Model using Information on Quantities," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235599, Agricultural and Applied Economics Association.
    5. Guerra Vallejos, Ernesto & Bobenrieth Hochfarber, Eugenio & Bobenrieth Hochfarber, Juan & Wright, Brian D., 2021. "Solving dynamic stochastic models with multiple occasionally binding constraints," Economic Modelling, Elsevier, vol. 105(C).
    6. Kleppe, Tore Selland & Oglend, Atle, 2017. "Estimating the competitive storage model: A simulated likelihood approach," Econometrics and Statistics, Elsevier, vol. 4(C), pages 39-56.
    7. Colin A. Carter & Gordon C. Rausser & Aaron Smith, 2011. "Commodity Booms and Busts," Annual Review of Resource Economics, Annual Reviews, vol. 3(1), pages 87-118, October.
    8. Evans, Lewis & Guthrie, Graeme, 2007. "Commodity Price Behavior With Storage Frictions," Working Paper Series 3966, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    9. Eugenio S.A. Bobenrieth & Juan R.A. Bobenrieth & Ernesto A. Guerra & Brian D. Wright & Di Zeng, 2021. "Putting the Empirical Commodity Storage Model Back on Track: Crucial Implications of a “Negligible” Trend," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(3), pages 1034-1057, May.
    10. repec:vuw:vuwscr:19065 is not listed on IDEAS
    11. Evans, Lewis & Guthrie, Graeme, 2007. "Commodity Price Behavior With Storage Frictions," Working Paper Series 19065, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    12. Christophe Gouel, 2013. "Comparing Numerical Methods for Solving the Competitive Storage Model," Computational Economics, Springer;Society for Computational Economics, vol. 41(2), pages 267-295, February.
    13. Fabio Gaetano Santeramo & Emilia Lamonaca & Francesco Contò & Gianluca Nardone & Antonio Stasi, 2018. "Drivers of grain price volatility: a cursory critical review," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 64(8), pages 347-356.
    14. Diagne, Youssoupha S & Fall, Alsim, 2009. "La spéculation contribue- t- elle à expliquer la dynamique des prix des produits alimentaires au Sénégal ? [Does speculation explain food prices movements in Senegal?]," MPRA Paper 54880, University Library of Munich, Germany.
    15. Gabriela Simonet & Julie Subervie & Driss Ezzine-De-Blas & Marina Cromberg & Amy Duchelle, 2015. "Paying smallholders not to cut down the amazon forest: impact evaluation of a REDD+ pilot project," Working Papers 1514, Chaire Economie du climat.
    16. Christophe Gouel & Nicolas Legrand, 2017. "Estimating the Competitive Storage Model with Trending Commodity Prices," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(4), pages 744-763, June.
    17. Pieroni, Luca & Ricciarelli, Matteo, 2008. "Modelling dynamic storage function in commodity markets: Theory and evidence," Economic Modelling, Elsevier, vol. 25(5), pages 1080-1092, September.
    18. Assia Elgouacem, 2018. "Essays on investment and saving [Essais sur l’investissement et l’épargne]," SciencePo Working papers Main tel-03419405, HAL.
    19. repec:diw:diwwpp:dp971 is not listed on IDEAS
    20. Eyal Dvir & Ken Rogoff, 2009. "The Three Epochs of Oil," Boston College Working Papers in Economics 706, Boston College Department of Economics.
    21. De Lipsis, Vincenzo & Agnolucci, Paolo, 2024. "Climate change and the US wheat commodity market," Journal of Economic Dynamics and Control, Elsevier, vol. 161(C).
    22. Juan R. A. Bobenrieth & Eugenio S. A. Bobenrieth & Andrés F. Villegas & Brian D. Wright, 2022. "Estimation of Endogenous Volatility Models with Exponential Trends," Mathematics, MDPI, vol. 10(15), pages 1-27, July.

    More about this item

    Keywords

    empirical validation; storage model; structural econometrics; commodity price dynamics;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:journl:hal-01924388. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.