Abstract:
The second of this series of two papers is devoted to a theoretical analysis of spatial interaction between commodity markets. The theoretical framework that we present is referred to as the stochastic spatial arbitrage model (SSAM); it accounts for most of the empirical regularities observed in the first paper. Two basic mechanisms are found to be responsible for spatial inter-market interaction, namely (i) spatial arbitrage and hedging conducted by traders, (ii) spatial correlation between local shocks; the latter is favored by a similar economic and cultural environment. The SSAM includes both effects and offers a wide range of predictions about price volatility, trade, price correlations, price differentials. Statistical tests display a convergent array of evidence in favor of the model. However several predictions cannot be tested by lack of statistical evidence, a circumstance which shows that yet additional “experimental” work is r! equired.
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Received 17 May 1999 and Received in final form 31 May 1999
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Roehner, B. The correlation length of commodity markets 2. Theoretical framework. Eur. Phys. J. B 13, 189–200 (2000). https://doi.org/10.1007/s100510050022
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DOI: https://doi.org/10.1007/s100510050022