Testing for Rational Bubbles in the Commodity Market

In order to hedge price-fluctuation risks, to derive fair prices, and to operate fundsas a new asset class, both expectations and concerns about commodity markets have been increasing.This paper proposes a sufficient condition for the absence of rational bubbles in the commodity market: that the first differences of real prices are stationary. This condition is proposed on the assumption that products of the convenience yield and the real prices are stationary. By applying this approach to the US crude oil and natural gas marketsfrom 3 January 2007, to 30 December 2011, the absence of rational bubbles in both markets can be verified.One should interpretthese large price fluctuations as caused by much larger income elasticity than price elasticity.These prices reflect thefundamental values of these commodities.