ADAPTIVE PRICE EXPECTATIONS AND THE MODELLING OF WORLD GOLD PRICE DYNAMICS
Journal Title: International Journal of Management, IT and Engineering - Year 2012, Vol 2, Issue 9
Abstract
Market models that incorporate inventories without including expectation factors assume that all inventories are unintended. This assumption is not true in mineral commodity markets where hedging and speculation are rife. This study investigates how the introduction of price expectations alters the results of an earlier basic market model for gold based only on current price and inventory factors. Expectations-augmented demand and supply functions, together with an inventory formulation, are used to develop a second-order linear difference equation in prices, whose solution is definitized into a price time path by application of 1980-2009 data. Demand and supply functions obtained are largely consistent with theory. The expected-price variable has greater marginal impact coefficients than current price. The introduction of adaptive expectations makes the price time path slightly divergent, and the intertemporal equilibrium price becomes variable as it depends on lagged inventory accumulation and time. Unlike in the earlier study, a retrospective computation of equilibrium prices yields positive values. The model‟s predictive power does not improve significantly over that of the basic model.
Authors and Affiliations
Lyman Mlambo
Keywords
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