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Storage, Slow Transport, and the Law of One Price: Evidence from the Nineteenth Century U.S. Corn Market

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  • Andrew Coleman

    (Cattaneo University, LIUC and CESPRI, Bocconi University)

Abstract

This paper develops a rational expectations model of physical arbitrage incorporating storage and trade to explain how markets are integrated when trade is costly and non-instantaneous. The paper finds a striking empirical verification of the model from an analysis of the late nineteenth century corn markets in Chicago and New York. The dataset is particularly high quality and includes weekly data on spot and future prices, storage quantities and the cost of three modes of transport for a fourteen year period. In keeping with the model, it is shown that the New York spot price frequently exceeded both the New York futures price and the Chicago spot price plus the transport cost by several percent when inventories in New York were low, but not when they were high. The paper also derives a supply of storage curve for New York corn and argues it can be explained as the outcome of rational arbitrage when transport is slow.

Suggested Citation

  • Andrew Coleman, 2004. "Storage, Slow Transport, and the Law of One Price: Evidence from the Nineteenth Century U.S. Corn Market," Working Papers 502, Research Seminar in International Economics, University of Michigan.
    • Handle: RePEc:mie:wpaper:502
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    File URL: http://fordschool.umich.edu/rsie/workingpapers/Papers501-525/r502.pdf
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    Cited by:

    1. Gilles Duranton & Michael Storper, 2008. "Rising trade costs? Agglomeration and trade with endogenous transaction costs," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 41(1), pages 292-319, February.
    2. Darbha, Gangadhar & Patel, Urjit R., 2004. "Nonlinear Adjustment in Real Exchange Rates and Long Run Purchasing Power Parity--Further Evidence," Working Papers 04-1, University of Pennsylvania, Wharton School, Weiss Center.
    3. Andrew Coleman, 2007. "A model of spatial arbitrage with transport capacity constraints and endogenous transport prices," Reserve Bank of New Zealand Discussion Paper Series DP2007/05, Reserve Bank of New Zealand.
    4. Andrew Coleman, 2007. "The pitfalls of estimating transactions costs from price data: evidence from trans-Atlantic gold-point arbitrage, 1886-1905," Reserve Bank of New Zealand Discussion Paper Series DP2007/07, Reserve Bank of New Zealand.
    5. Ihle, Rico & von Cramon-Taubadel, Stephan, 2008. "A Comparison of Threshold Cointegration and Markov-Switching Vector Error Correction Models in Price Transmission Analysis," 2008 Conference, April 21-22, 2008, St. Louis, Missouri 37603, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.

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