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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
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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

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