Price formation in the raw wool market

Abstract

Econometric analysis of the demand for raw wool at auction published by other authors has been mainly confined to an analysis of the determinants of the consumption of raw wool. However the purchaser of raw wool at auction must hold his purchases either in transit or in store for some months before either reselling or consuming wool in his own mills. Thus the conventional analysis of the determinants of the demand for wool for consumption is not directly relevant when considering the short run demand for wool at auction. As a result, models based on the conventional analysis do not adequately explain fluctuations in prices paid at auction in primary markets. An earlier attempt by Philpott to explain such fluctuations used annual data. Based on this earlier work we develop in this paper two models of quarterly demand for raw wool at auction and we test these models against quarterly data for the period 1952 to the first quarter of 1967.