ABSTRACT
In this section, we study the evolution of the equilibrium price of a good (coffee, for instance) that can be traded for speculative purposes and used for consumption. However, the focus is on the effects of speculative trading, hence we specify a very simple excess supply function for the good. The speculative demands are derived from the portofolio choice problem of risk averse traders who can invest in a risky and a riskless asset. We then derive explicit forms of equilibrium paths and dicuss the effects of various factors on the amplitude of the risk premium.
