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Nonlinear Vector Error Correction Models in Price Transmission Analysis: Threshold Models vs. Markov-Switching Models

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  • Ihle, Rico
  • von Cramon-Taubadel, Stephan

Abstract

This work provides a comparison of methodologies for applied research in price transmission analysis. We compare two regime-dependent econometric models, namely the threshold vector error correction model and the Markov-switching vector error correction model. We first provide a conceptual comparison in which we find that the regime-switching mechanisms of the models differ fundamentally so that each model is suitable for a certain type of nonlinear price trans-mission. Furthermore, we conduct a Monte Carlo experiment in order to study the performance of each of the models’ estimation techniques for simulated data. Although each model possesses an immediate economic interpretation which well matches an aspect of the theory of price transmission, the simulation results indicate that the corresponding estimation techniques yield biased estimates of low precision.

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Bibliographic Info

Paper provided by European Association of Agricultural Economists in its series 2008 International Congress, August 26-29, 2008, Ghent, Belgium with number 44198.

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Date of creation: 2008
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Handle: RePEc:ags:eaae08:44198

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Keywords: price transmission; threshold vector error correction model; Markov-switching vector error correction model; Demand and Price Analysis;

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  1. James D. Hamilton & Baldev Raj, 2002. "New directions in business cycle research and financial analysis," Empirical Economics, Springer, vol. 27(2), pages 149-162.
  2. Kelvin Balcombe & Alastair Bailey & Jonathan Brooks, 2007. "Threshold Effects in Price Transmission: The Case of Brazilian Wheat, Maize, and Soya Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(2), pages 308-323.
  3. Zacharias Psaradakis & Martin Sola & Fabio Spagnolo, 2004. "On Markov error-correction models, with an application to stock prices and dividends," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(1), pages 69-88.
  4. Meyer, Jochen, 2003. "Measuring Market Integration In The Presence Of Transaction Costs - A Threshold Vector Error Correction Approach," 2003 Annual Meeting, August 16-22, 2003, Durban, South Africa 25869, International Association of Agricultural Economists.
  5. Hans-Martin Krolzig & Massimiliano Marcellino & Grayham E. Mizon, . "A Markov-Switching Vector Equilibrium Correction Model of the UK Labour Market," Working Papers 185, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  6. Nathan S. Balke & Thomas B. Fomby, 1992. "Threshold cointegration," Research Paper 9209, Federal Reserve Bank of Dallas.
    • Balke, Nathan S & Fomby, Thomas B, 1997. "Threshold Cointegration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-45, August.
  7. McNew, Kevin & Fackler, Paul L., 1997. "Testing Market Equilibrium: Is Cointegration Informative?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 22(02), December.
  8. M. Ben-Kaabia & José M. Gil, 2007. "Asymmetric price transmission in the Spanish lamb sector," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 34(1), pages 53-80, March.
  9. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
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