Optimal stockpiling in a high-risk commodity market the case of copper

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Abstract

Economists recognise the need for making decisions which are sensitive to risk, but they have been unable to compute the decisions which satisfy the von Neumann-Morgenstern theory of choice under risk in a multivariable dynamic context. This paper explores sequential decision rules which optimise a second-order approximation to von Neumann-Morgenstern utilities, with arbitrary probability distributions and intertemporal stochastic dependence. These rules are used to generate optimal stockpiling rules for stabilising the price in a high-risk commodity market. A clear trade-off emerges between the ambition and security objectives of market management.

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