ABSTRACT
Important to commodity price forecasting studies dealing with risk is the formation of expectations. Although the rational expectations assumption is a standard feature of most work in modern macroeconomics and finance, more recent studies have found that the conclusions of this theory are often in conflict with empirical results. The latter suggest that to the contrary agents are heterogeneous and display bounded rationality. Examples include Frydman and Phelps (1983), Board (1994), Arthur (1994), Kyrtsou and Terraza (2002a,b), and Chiarella et al. (2000). Newly developed financial models also have attempted to explain that the main cause of chaotic structures in asset prices is the heterogeneity of traders' expectations (Brock and Hommes, 1998; Lux, 1995, 1998; and Gaunersdorfer, 2000). However, the discovery of chaotic processes is difficult; one can find randomness or noisy chaos, which is a dynamic chaotic system disturbed by random noise. Modeling such processes also is difficult. Nonlinear models may see price fluctuations triggered by an interaction between a stabilizing force driving prices back towards fundamental values when the market is dominated by fundamentalists, while destabilizing forces drive prices away from their
Dynamics in Commodity Markets," Empirical Economics, 29: 489-502. The author and publisher would like to thank my co-authors and Springer-Verlag GmbH who kindly gave permission for use of this copyright material.
