Mean Reversion in Auction Markets

Abstract

Mean reversion is a process that influences commodity prices in auction markets. This process captures price dynamics that the traditional static model of demand and supply cannot fully explain. By accounting for periodic shocks to demand and supply, mean reversion provides a more accurate pricing model under conditions of uncertainty. This article presents empirical evidence that various commodities traded in auction markets exhibit mean reversion in their pricing. This mean reversion is a significant component of total volatility. After accounting for commodity value, the derived volatility pattern aligns with the observed volatility pattern of a commodity.