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The formation of price expectations: a case study of the soybean market

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  • Langley, Suchada Vichitakul

Abstract

Stochastic dynamic optimization is performed for a representative consumer and producer in the soybean market. Each is assumed to maximize the expected value of the infinite sum of the present value of his (her) income stream. Optimum rules for each side are solved as a function of, among other things, expected future prices. Three price expectations are applied--rational, adaptive, and cash-futures. Estimation, based upon the aggregate U.S. soybean market. Time series analysis and Granger-causality test are utilized at the first stage of estimation in order to obtain information which help to forecast prices. The derived decision rules under rational expectations hypothesis are nonlinear function of parameters appearing in agents' objective functions. All variables that are in the information set which help to predict future values of prices are in the decision rules. The response functions of all decision rules under rational expectations hypothesis depend upon the values of all structural parameters. Dynamic simulation of Quasi-Rational expectations model is performed with relatively good results. The estimation under the other two hypotheses--adaptive and cash-futures price expectations--are relatively inferior.

Suggested Citation

  • Langley, Suchada Vichitakul, 1982. "The formation of price expectations: a case study of the soybean market," ISU General Staff Papers 198201010800009358, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:198201010800009358
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    Cited by:

    1. Tsai, Grace Yueh-Hsiang, 1989. "A dynamic model of the U.S. cotton market with rational expectations," ISU General Staff Papers 1989010108000012168, Iowa State University, Department of Economics.
    2. Tegene, Abebayehu, 1983. "A rational expectations approach to the modelling of agricultural supply: a case study of Iowa," ISU General Staff Papers 198301010800009963, Iowa State University, Department of Economics.
    3. Langley, James A., 1983. "Regional acreage response functions for major US field crops: estimation and policy implications," ISU General Staff Papers 198301010800008678, Iowa State University, Department of Economics.

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