Application of nonlinear mapping theory to commodity price fluctuations (Q1123109)

This paper provides an exploration into the requisite modifications of the cobweb theory when the demand and supply mappings include some nonlinear terms of past prices. Applying the linear theory to US crude oil market suggests instability, which under linearity would mean explosive price paths. It is shown that adding appropriate quadratic terms to the difference equation on prices can mimic the time paths in the past periods for actual series and can be predicted by linear models. In addition, the future prediction of a nonlinear model provides a bounded oscillatory path in comparison to the ever increasing oscillations predicted by the linear models.