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Related Experiment Videos

Stochastic speculative price.

P A Samuelson1

  • 1Department of Economics, Massachusetts Institute of Technology, Cambridge, Mass. 02139.

Proceedings of the National Academy of Sciences of the United States of America
|February 1, 1971
PubMed
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This study models wheat prices using stochastic processes, finding that expected prices, not certain ones, drive arbitrage and market behavior. The model reveals price dynamics consistent with real-world commodity markets.

Area of Science:

  • Agricultural Economics
  • Financial Mathematics
  • Econometrics

Background:

  • Commodity prices are linked over time by speculative arbitrage.
  • Harvest uncertainty necessitates stochastic models for market behavior.

Purpose of the Study:

  • To model commodity price behavior using stochastic processes.
  • To analyze the impact of expected prices on arbitrage and carryover decisions.

Main Methods:

  • Developed a stochastic-dynamic-programming model.
  • Applied the axiom that expected prices, not certain prices, influence market decisions.
  • Analyzed the resulting stationary time series.

Main Results:

  • The model generates price behavior based on expected future prices.

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  • The derived time series exhibits an ergodic state.
  • The model's properties align with observed real-world market behavior.

    • Conclusions:

    • Expected prices are crucial drivers in commodity arbitrage and carryover.
    • Stochastic-dynamic-programming provides a robust framework for commodity price modeling.
    • The model offers insights into the normative properties of financial markets.