Structural Model of Long-Term Commodity Price Dynamics

29 Pages Posted: 3 Nov 2013 Last revised: 28 Mar 2015

Hamed Ghoddusi

Stevens Institute of Technology - School of Business

Date Written: February 1, 2011

Abstract

This paper contributes to the theories commodity prices and exhaustible resources by examining simultaneous optimal resource extraction and dynamic capacity building. I analyze the ways in which random demand process and irreversible capacity options shape the long-term price and volatility path of exhaustible resource. The model suggest a mean-reverting price path in the initial stages of extraction which is a possible resolution for the old puzzle of why the predictions of Hotelling's model (Hotelling (1931)) are not observed in reality. The results of this paper can contribute to a better understanding of long-run energy and commodity supply elasticity and price dynamics.

Keywords: Commodity Prices, Capacity Expansion Options, Hotelling Role, Investment Under Uncertainty

JEL Classification: Q31, G13

Suggested Citation

Ghoddusi, Hamed, Structural Model of Long-Term Commodity Price Dynamics (February 1, 2011). Available at SSRN: https://ssrn.com/abstract=2348928 or http://dx.doi.org/10.2139/ssrn.2348928

Hamed Ghoddusi (Contact Author)

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

HOME PAGE: http://www.ghoddusi.com

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