SPECULATIVE STORAGE, FUTURES MARKETS, AND THE STABILITY OF COMMODITY PRICES

A theoretical dynamic model is developed that integrates the micro-behavior of commodity and futures speculators into the simultaneous determination of cash and futures prices in a storable commodity market. The model is used to demonstrate the way in which the introduction of a futures market, by affecting the decisions of speculative inventory holders, alters the distribution of spot prices and to elucidate the conditions that render futures trading stabilizing for cash prices.