Working Papers

WP #2015-13 Estimating the competitive storage model with trending commodity prices

Published on 13 November 2015

Estimating the competitive storage model with trending commodity prices

by Christophe Gouel, Nicolas Legrand

We present a method to estimate jointly the parameters of a
standard commodity storage model and the parameters
characterizing the trend in commodity prices. This procedure allows
the influence of a possible trend to be removed without restricting
the model specification, and allows model and trend selection
based on statistical criteria. The trend is modeled deterministically
using linear or cubic spline functions of time. The results show that
storage models with trend are always preferred to models without
trend. They yield more plausible estimates of the structural
parameters, with storage costs and demand elasticities that are
more consistent with the literature. They imply occasional stockouts,
whereas without trend the estimated models predict no stockouts
over the sample period for most commodities. Moreover,
accounting for a trend in the estimation imply price moments closer
to those observed in commodity prices. Our results support the
empirical relevance of the speculative storage model, and show
that storage model estimations should not neglect the possibility of
long-run price trends.

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