Quarterly models of price formation in the raw wool market

Abstract

The object of this study is an econometric evaluation of the factors determining the price of raw wool. Since the war, wool prices have been the subject of three published econometric studies by Philpott and Horner. The distinguishing feature of the present study is the period of analysis. The earlier studies were directed towards an analysis or the factors determining the average level of wool prices over a period of from one to three years. By focusing on quarterly price movements, our attention will be directed towards the factors producing fluctuations in price as distinct from the underlying trends in prices that become apparent in the annual and three year moving average data used by Horner and Philpott.

In terms of the classification of the period of analysis employed by Philpott, the models developed in this study are all "short run" models. This follows the assumption that a period of three months is too short to allow either the amount of wool offered for sale by farmers or the rate of consumption of raw wool by textile manufacturers to be influenced by the current price of wool. The short run models presented assume that equilibrium in the market is attained not through the adjustment of production or consumption but through movements in the speculative demand for stocks which alone are assumed to be responsive to current price movements.

A second distinctive feature of this study is the incorporation of data concerning movements in the stocks of raw wool held by wool buyers, manufacturers and speculators. Philpott estimated the parameters of an annual model which he derived as a short run model along the lines suggested above. However he was unable to include stocks of wool specifically as an explanatory variable due to the lack of available data. Published data on stocks of raw wool is still of little value. This study relies on my own estimates of commercial stocks of raw wool. These estimates are fully discussed in chapter III.