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Modeling Price Transmission between Farm and Retail Prices: A Soft Switches Approach

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  • Hahn, William F
  • Stewart, Hayden
  • Blayney, Donald P
  • Davis, Christopher G.

Abstract

Vector error correction models (VECM) are used to model price transmission when farm and retail prices are cointegrated. To allow for non-linearity in the cointegration process, researchers may specify thresholds to break the error correction process into regimes according to whether the retail price is above, below, or close to its equilibrium value given farm prices. However, because the coefficients in a VECM can change when there is movement from one regime to another, the model can be discontinuous. This implies sudden, “hard” regime changes. In this study, we extend the threshold VECM to include features of STAR models. Our approach allows for gradual, soft regime changes. An empirical application to retail cheese and farm milk price is presented.

Suggested Citation

  • Hahn, William F & Stewart, Hayden & Blayney, Donald P & Davis, Christopher G., 2015. "Modeling Price Transmission between Farm and Retail Prices: A Soft Switches Approach," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 204951, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea15:204951
    DOI: 10.22004/ag.econ.204951
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    Cited by:

    1. Leung, Henry & Furfaro, Frank, 2020. "Comovement of dairy product futures and firm value: returns and volatility," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 64(3), July.
    2. Mai, Thang Chien & Shakur, Shamim & Cassells, Sue, 2016. "Price Asymmetry of Coffee Beans: Evidence from Vietnam," 2016 Conference, August 25-26, Nelson, New Zealand 260807, New Zealand Agricultural and Resource Economics Society.
    3. Yizao Liu & Xuan Chen & Adam N. Rabinowitz, 2019. "The role of retail market power and state regulations in the heterogeneity of farm‐retail price transmission of private label and branded products," Agricultural Economics, International Association of Agricultural Economists, vol. 50(1), pages 91-99, January.
    4. Henry Leung & Frank Furfaro, 2020. "Comovement of dairy product futures and firm value: returns and volatility," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 64(3), pages 632-654, July.
    5. Tejeda, Hernan A. & Kim, Man-Keun, 2020. "Dynamic price relationships and price discovery among cheese markets," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association, vol. 24(1), September.
    6. Sergio H. Lence & GianCarlo Moschini & Fabio Gaetano Santeramo, 2018. "Threshold cointegration and spatial price transmission when expectations matter," Agricultural Economics, International Association of Agricultural Economists, vol. 49(1), pages 25-39, January.
    7. A. Ford Ramsey & Barry K. Goodwin & William F. Hahn & Matthew T. Holt, 2021. "Impacts of COVID‐19 and Price Transmission in U.S. Meat Markets," Agricultural Economics, International Association of Agricultural Economists, vol. 52(3), pages 441-458, May.

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    More about this item

    Keywords

    Agricultural and Food Policy; Demand and Price Analysis; Research Methods/ Statistical Methods;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture

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