A behavioral cobweb-like commodity market model with heterogeneous speculators

a r t i c l e i n f o According to empirical studies, speculators place significant orders in commodity markets and may cause bubbles and crashes. This paper develops a cobweb-like commodity market model that takes into account the behavior of technical and fundamental speculators. We show that interactions between consumers, producers and heterogeneous speculators may produce price dynamics which mimics the cyclical price motion of actual commodity markets, i.e., irregular switches between bullish and bearish price developments. Moreover, we find that the impact of speculators on price dynamics is non-trivial: depending on the market structure, speculative transactions may either be beneficial or harmful for market stability. A key characteristic of commodity price dynamics is their strong cyclical behavior. Cashin et al. (2002), who examine the price action of 36 commodities in the period from 1957 to 1999, report that the average price fall across all commodities was 46% during slumps, while the average price rise across all commodities was 42% during booms. Individual price series are, of course, even more volatile: The price for coconut oil dropped by around 88% between June 1984 and August 1986 and the price of coffee arabica increased by around 84% from April 1975 to April 1977. Further empirical evidence of commodity price fluctuations is provided by Borenzstein et al. (1994) and Deaton (1999). Alterations between bull and bear markets have important implications for many developing countries dependent on commodity exports. Dramatic price changes may cause severe fluctuations in earnings from commodity exports. A thorough understanding of commodity price dynamics is thus of great significance , especially for policy makers who plan to conduct counter-cyclical stabilization policies (Newbery and Stiglitz, 1981). Several theories have been proposed which give us valuable insight into the dynamics of commodity prices. Our approach is related to cobweb models (e.g. which describe the price dynamics in a market of a non-storable good that takes one time unit to produce. As a result, suppliers must form price expectations one period ahead. Such a view is not unrealistic. Consider, for instance, the cultivation of crops. The growing season guarantees a finite lag between the time the production decision is made and the time the crop is ready for sale. The decision about how much should be produced is based on current and past experience. Remember that classical linear cobweb models with naive expectations are able to reproduce oscillatory price …