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Abstract

What are the sources of commodity price volatility changes? Based on observation of the palm-oil market (1818-1999), our hypothesis is that the superimposition of short-distance operators located near the export supply, whose expectation horizon is limited to a few weeks, and long-distance operators further from the export supply, whose expectation horizon exceeds six months to one year, is responsible for volatility changes and market instability. Because of the superimposition of expectations horizons, volatility grows along with the development of short-distance trade. We support this hypothesis using a trader-behavior model derived from Day and Huang [J. Econ. Behavior Org. 14 (1990) 299] and Day [Complex Economic Dynamics, Vol. I. MIT Press, Cambridge, MA]. Our simulation results challenge the argument that trade liberalization and market enlargement necessarily reduce commodity prices volatility.© 2001 Elsevier Science B.V. All rights reserved.

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