The Effects of Stocks and Price Floors on Price Dynamics and Volatility: An Application to the U.S. Nonfat Dry Milk Market
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This paper presents an econometric analysis of the effects of price support programs
and stocks on price dynamics and price volatility. Considering a price support program as a
censoring mechanism, market prices are specified as a dynamic Tobit model with time
varying volatility. The model is applied to the U.S. nonfat dry milk market to examine the
impact of market liberalization on price dynamics and price volatility in the presence of
private and public stocks. The econometric results show how the price support program and
stocks (both private and public) affect expected price and price volatility. They document the
role of stocks in reducing price volatility.