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Estimating a nonlinear rational expectations commodity price model with unobservable state variables
Author(s) -
Deaton Angus,
Laroque Guy
Publication year - 1995
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.3950100503
Subject(s) - unobservable , speculation , econometrics , linearization , economics , anticipation (artificial intelligence) , commodity , state variable , rational expectations , nonlinear system , quadratic equation , profit (economics) , microeconomics , computer science , mathematics , finance , physics , quantum mechanics , thermodynamics , geometry , artificial intelligence
This paper is concerned with the estimation of a model in which a possibly serially correlated stochastic process, the ‘harvest’ of an agricultural commodity, generates a competitive price in a market comprising both final consumers and risk‐neutral speculators who can store the commodity at a cost in the anticipation of profit. Because storage cannot be negative, the relationship between prices and harvests is inherently nonlinear and is an unpromising candidate for a linear‐quadratic model, or for linearization more generally. Instead, we calculate numerically a policy function in which price is a function of two unobservable state variables, the harvest and current availability, and we use the result to fit the price data.