A stochastic optimal stopping model for storable commodity prices

Abstract

In this paper, we propose a continuous time version of the well-known speculative storage model for commodity prices. But from the mathematical point of view this is not a trivial extension and needs careful consideration of the theory of stochastic stopping time combined with fixed point theory. We formulate the problem in a manner that the main objective of the storage model, known as the stationary rational expectations equilibrium (SREE), becomes a fixed-point of an operator which solves a free boundary problem and show that this operator under some conditions is a contraction. We also demonstrate the benefits of our continuous time model through a numerical algorithm.