Abstract:
We develop a behavioral commodity market model with consumers, producers and
heterogeneous speculators to characterize-tile-nature of commodity price fluctuations and to
explore the effectiveness of price stabilization schemes. Within our model, we analyze how
nonlinear interactions between market participants can create either bull or bear markets, or
irregular price fluctuations between bull and bear markets through a (global) homoclinic
bifurcation. Both the imposition ofa bottoming price level (to support producers) or a topping
price level (to protect consumers) can eliminate such homoclinic bifurcations and hence reduce
market price volatility, However, simple policy rules, such as price limiters, may have
unexpected consequences in a complex environment: a minimum price level decreases the
average price while a maximum price limit increases the average price. In addition, price
limiters influence the price dynamics in an intricate way and may cause volatility clustering.
