Commodity markets, price limiters and speculative price dynamics

Abstract

We develop a behavioral commodity market model with consumers, producers and heterogeneous speculators to characterize the nature of commodity price fluctuations and to explore the effectiveness of price stabilization schemes. Within our model, we analyze how nonlinear interactions between market participants can create either bull or bear markets, or irregular price fluctuations between bull and bear markets through a (global) homoclinic bifurcation. Both the imposition of a bottoming price level (to support producers) or a topping price level (to protect consumers) can eliminate such homoclinic bifurcations and hence reduce market price volatility. However, simple policy rules, such as price limiters, may have unexpected consequences in a complex environment: a minimum price level decreases the average price while a maximum price limit increases the average price. In addition, price limiters influence the price dynamics in an intricate way and may cause volatility clustering. (c) 2004 Elsevier B.V. All rights reserved.