The correlation length of commodity markets. 2. Theoretical framework
LPTHE, University Paris 7, 2 place Jussieu, 75005 Paris, France
Corresponding author: a firstname.lastname@example.org
Revised: 31 May 1999
Published online: 15 January 2000
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 required.
PACS: 64.60.Fr – Equilibrium properties near critical points, critical exponents / 87.23.Ge – Dynamics of social systems / 89.40.+k – Transportation
© EDP Sciences, Società Italiana di Fisica, Springer-Verlag, 2000