Measuring Commodity Price Volatility and the Welfare Consequences of Eliminating Volatility

Richter, Christian, Caleiro, Antonio, Vieira, Carlos and Vieira, Isabel (2009) Challenges for Economic Policy Design: Lessons From the Financial Crisis. Saarbruecken, Germany : Lambert Academic Publisher. 475p. (INFER Series in Applied Economics) ISBN 9783838326702

Posted: 13 Jun 2013

See all articles by Amyaz A. Moledina

Amyaz A. Moledina

College of Wooster

Terry L. Roe

University of Minnesota - College of Agricultural, Food and Environmental Sciences - Department of Applied Economics

Mathew Shane

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS)

Date Written: May 16, 2004

Abstract

Commodity price volatility in international markets has been used to justify numerous policy interventions, including the need for buffer stocks and counter-cyclical payments. The common measure of volatility, the standard deviation or coefficient of variation, likely overstates the actual variation faced by economic agents. By making a distinction between its predictable and unpredictable components, volatility is found to be low, suggesting that significant welfare gains may be unattainable with policy interventions designed to stabilize prices. The use of the standard deviation implies price volatility as high as 30 percent for certain grain markets. Removing the predictable components from this measure decreases volatility to between 0.1 percent and 15.9 percent. We find little evidence to suggest that volatility is increasing over time for all commodities. The benefits of eliminating low levels of commodity price volatility are small, less than 1percent of consumption for the majority of commodities studied.

Keywords: volatility, commodity, conditional standard deviation, prices

JEL Classification: Q11, D61, C22

Suggested Citation

Moledina, Amyaz A. and Roe, Terry L. and Shane, Mathew, Measuring Commodity Price Volatility and the Welfare Consequences of Eliminating Volatility (May 16, 2004). Richter, Christian, Caleiro, Antonio, Vieira, Carlos and Vieira, Isabel (2009) Challenges for Economic Policy Design: Lessons From the Financial Crisis. Saarbruecken, Germany : Lambert Academic Publisher. 475p. (INFER Series in Applied Economics) ISBN 9783838326702, Available at SSRN: https://ssrn.com/abstract=2278452

Amyaz A. Moledina (Contact Author)

College of Wooster ( email )

Department of Economics, Morgan Hall
College of Wooster
Wooster, OH 44691
United States
(330) 263-2287 (Phone)

HOME PAGE: http://www.wooster.edu/economics/amoledina/

Terry L. Roe

University of Minnesota - College of Agricultural, Food and Environmental Sciences - Department of Applied Economics ( email )

1994 Buford Avenue
St. Paul, MN 55108
United States

Mathew Shane

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS) ( email )

355 E Street, SW
Washington, DC 20024-3221
United States
202-694-5282 (Phone)

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