Advanced Search
MyIDEAS: Login

A Comparison of Threshold Cointegration and Markov-Switching Vector Error Correction Models in Price Transmission Analysis

Contents:

Author Info

  • Ihle, Rico
  • von Cramon-Taubadel, Stephan

Abstract

We compare two regime-dependent econometric models for price transmission analysis, namely the threshold vector error correction model and Markov-switching vector error correction model. We first provide a detailed characterization of each of the models which is followed by a comprehensive comparison. We find that the assumptions regarding the nature of their regime-switching mechanisms are fundamentally different so that each model is suitable for a certain type of nonlinear price transmission. Furthermore, we conduct a Monte Carlo experiment in order to study the performance of the estimation techniques of both models for simulated data. We find that both models are adequate for studying price transmission since their characteristics match the underlying economic theory and allow hence for an easy interpretation. Nevertheless, the results of the corresponding estimation techniques do not reproduce the true parameters and are not robust against nuisance parameters. The comparison is supplemented by a review of empirical studies in price transmission analysis in which mostly the threshold vector error correction model is applied.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://purl.umn.edu/37603
Download Restriction: no

Bibliographic Info

Paper provided by NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management in its series 2008 Conference, April 21-22, 2008, St. Louis, Missouri with number 37603.

as in new window
Length:
Date of creation: 2008
Date of revision:
Handle: RePEc:ags:nccest:37603

Contact details of provider:
Postal: 326 Mumford Hall, MC-710, 1301 West Gregory Drive, Urbana, Illinois, 61801
Phone: (217) 333-1810
Fax: (217) 333-5538
Email:
Web page: http://www.farmdoc.uiuc.edu/nccc134/
More information through EDIRC

Related research

Keywords: price transmission; market integration; threshold vector error correction model; Markov-switching vector error correction model; comparison; nonlinear time series analysis; Agricultural Finance;

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Teresa Serra & Barry K. Goodwin, 2004. "Regional Integration of Nineteenth Century U.S. Egg Markets," Journal of Agricultural Economics, Wiley Blackwell, vol. 55(1), pages 59-74.
  2. Gauri Prakash & Alan M. Taylor, 1997. "Measuring Market Integration: A Model of Arbitrage with an Econometric Application to the Gold Standard, 1879-1913," NBER Working Papers 6073, National Bureau of Economic Research, Inc.
  3. Christophe Chamley, 1999. "Coordinating Regime Switches," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 869-905, August.
  4. Camacho, Maximo, 2005. "Markov-switching stochastic trends and economic fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 29(1-2), pages 135-158, January.
  5. Moschini, GianCarlo & Meilke, Karl D., 1989. "Modeling the Pattern of Structural Change in U.S. Meat Demand," Staff General Research Papers 11266, Iowa State University, Department of Economics.
  6. Trenkler, Carsten & Wolf, Nikolaus, 2004. "Economic integration across borders : the Polish interwar economy 1921-1937," Papers 2004,38, Humboldt-Universität Berlin, Center for Applied Statistics and Economics (CASE).
  7. Goodwin, Barry K. & Grennes, Thomas J., 1998. "Tsarist Russia and the World Wheat Market," Explorations in Economic History, Elsevier, vol. 35(4), pages 405-430, October.
  8. Bai, Jushan, 1997. "Estimating Multiple Breaks One at a Time," Econometric Theory, Cambridge University Press, vol. 13(03), pages 315-352, June.
  9. Serra, Teresa & Goodwin, Barry K., 2002. "Specification Selection Issues In Multivariate Threshold And Switching Models," 2002 Annual meeting, July 28-31, Long Beach, CA 19843, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  10. Ben Kaabia, Monia & Gil, Jose Maria & Boshnjaku, L., 2002. "Price Transmission Asymmetries in the Spanish Lamb Sector," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 24908, European Association of Agricultural Economists.
  11. Teresa Serra & Barry Goodwin, 2003. "Price transmission and asymmetric adjustment in the Spanish dairy sector," Applied Economics, Taylor & Francis Journals, vol. 35(18), pages 1889-1899.
  12. Teresa Serra & Barry K. Goodwin & José M. Gil & Anthony Mancuso, 2006. "Non-parametric Modelling of Spatial Price Relationships," Journal of Agricultural Economics, Wiley Blackwell, vol. 57(3), pages 501-522.
  13. Van Campenhout, Bjorn, 2007. "Modelling trends in food market integration: Method and an application to Tanzanian maize markets," Food Policy, Elsevier, vol. 32(1), pages 112-127, February.
  14. Hamilton, James D., 1996. "Specification testing in Markov-switching time-series models," Journal of Econometrics, Elsevier, vol. 70(1), pages 127-157, January.
  15. Kim, C-J., 1991. "Dynamic Linear Models with Markov-Switching," Papers 91-8, York (Canada) - Department of Economics.
  16. 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.
  17. Fackler, Paul L. & Goodwin, Barry K., 2001. "Spatial price analysis," Handbook of Agricultural Economics, in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 1, chapter 17, pages 971-1024 Elsevier.
  18. Maurice Obstfeld & Alan M. Taylor, 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," NBER Working Papers 6053, National Bureau of Economic Research, Inc.
  19. Goldfeld, Stephen M. & Quandt, Richard E., 1973. "A Markov model for switching regressions," Journal of Econometrics, Elsevier, vol. 1(1), pages 3-15, March.
  20. Jacks, David S., 2005. "Intra- and international commodity market integration in the Atlantic economy, 1800-1913," Explorations in Economic History, Elsevier, vol. 42(3), pages 381-413, July.
  21. Bruce Mizrach, 2006. "Nonlinear Time Series Analysis," Departmental Working Papers 200604, Rutgers University, Department of Economics.
  22. Howitt, P. & Mcfee, R.P., 1990. "Animal Spirits," UWO Department of Economics Working Papers 9005, University of Western Ontario, Department of Economics.
  23. Peter S. Sephton, 2003. "Spatial Market Arbitrage and Threshold Cointegration," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(4), pages 1041-1046.
  24. Krolzig, H.-M. & Toro, J., 2001. "A New Approach To The Analysis Of Business Cycle Transitions In A Model Of Output And Employment," Economics Series Working Papers 9959, University of Oxford, Department of Economics.
  25. McKenzie, Andrew M. & Pede, Valerien O., 2005. "Integration In Benin Maize Market: An Application Of Threshold Cointegration Analysis," 2005 Annual meeting, July 24-27, Providence, RI 19293, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  26. H. Krolzig, 1996. "Statistical Analysis of Cointegrated VAR Processes with Markovian Regime Shifts," SFB 373 Discussion Papers 1996,25, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  27. 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.
  28. Stefan Dercon & Bjorn Van Campenhout, 1999. "Dynamic Price Adjustment in Spatially Separated Food Markets with Transaction Costs," Center for Economic Studies - Discussion papers ces9909, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  29. repec:wop:humbsf:1996-25 is not listed on IDEAS
  30. Barry K. Goodwin & Nicholas E. Piggott, 2001. "Spatial Market Integration in the Presence of Threshold Effects," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(2), pages 302-317.
  31. Michael P. Clements & Hans-Martin Krolzig, 1998. "A comparison of the forecast performance of Markov-switching and threshold autoregressive models of US GNP," Econometrics Journal, Royal Economic Society, vol. 1(Conferenc), pages C47-C75.
  32. Massimiliano Marcellino & Grayham E. Mizon & Hans-Martin Krolzig, 2002. "A Markov-switching vector equilibrium correction model of the UK labour market," Empirical Economics, Springer, vol. 27(2), pages 233-254.
  33. Escobal, Javier, 2005. "The Role of Public Infraestructure in Market Development in Rural Peru," MPRA Paper 727, University Library of Munich, Germany.
  34. Meyer, Jochen, 2004. "Measuring market integration in the presence of transaction costs--a threshold vector error correction approach," Agricultural Economics, Blackwell, vol. 31(2-3), pages 327-334, December.
  35. Jacks, David S., 2006. "What drove 19th century commodity market integration?," Explorations in Economic History, Elsevier, vol. 43(3), pages 383-412, July.
  36. 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.
  37. Siklos, Pierre L. & Granger, Clive W.J., 1997. "Regime-Sensitive Cointegration With An Application To Interest-Rate Parity," Macroeconomic Dynamics, Cambridge University Press, vol. 1(03), pages 640-657, September.
  38. Federico, Giovanni, 2007. "Market integration and market efficiency: The case of 19th century Italy," Explorations in Economic History, Elsevier, vol. 44(2), pages 293-316, April.
  39. Julia K. Thomas, 1998. "Do Sunspots Produce Business Cycles?," GSIA Working Papers 1999-E10, Carnegie Mellon University, Tepper School of Business.
  40. Hall, Stephen & Psaradakis, Zacharias & Sola, Martin, 1997. "Switching error-correction models of house prices in the United Kingdom," Economic Modelling, Elsevier, vol. 14(4), pages 517-527, October.
  41. Teresa Serra & José M. Gil & Barry K. Goodwin, 2006. "Local polynomial fitting and spatial price relationships: price transmission in EU pork markets," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 33(3), pages 415-436, September.
  42. Bakucs, Lajos Zoltan & Ferto, Imre, 2007. "Spatial Integration On The Hungarian Milk Market," 104th Seminar, September 5-8, 2007, Budapest, Hungary 7832, European Association of Agricultural Economists.
  43. 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.
  44. Maria Soledad Martinez Peria, 2002. "A regime-switching approach to the study of speculative attacks: A focus on EMS crises," Empirical Economics, Springer, vol. 27(2), pages 299-334.
  45. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
  46. Carsten TRENKLER & Nikolaus WOLF, 2003. "Economic Integration in Interwar Poland - A Threshold Cointegration Analysis of the Law of One Price for Poland (1924-1937)," Economics Working Papers ECO2003/05, European University Institute.
  47. 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.
  48. Christopher B. Barrett, 1996. "Market Analysis Methods: Are Our Enriched Toolkits Well Suited to Enlivened Markets?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(3), pages 825-829.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Beckmann, Joscha & Czudaj, Robert, 2013. "Gold as an inflation hedge in a time-varying coefficient framework," The North American Journal of Economics and Finance, Elsevier, vol. 24(C), pages 208-222.
  2. Joscha Beckmann & Robert Czudaj, 2013. "Is there a Homogeneous Causality Pattern between Oil Prices and Currencies of Oil Importers and Exporters?," Ruhr Economic Papers 0431, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  3. Jolejole-Foreman, Maria Christina & Mallory, Mindy L. & Baylis, Katherine R., 2013. "Impact of Wheat and Rice Export Ban on Indian Market Integration," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150595, Agricultural and Applied Economics Association.
  4. Beckmann, Joscha & Czudaj, Robert, 2013. "Oil prices and effective dollar exchange rates," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 621-636.
  5. Listorti, Giulia & Esposti, Roberto, 2012. "Horizontal Price Transmission in Agricultural Markets: Fundamental Concepts and Open Empirical Issues," Bio-based and Applied Economics Journal, Italian Association of Agricultural and Applied Economics (AIEAA), issue 1, April.
  6. Busse, Stefan & Ihle, Rico, 2009. "German Rapeseed Oil and Biodiesel Pricing under Changing Market Conditions: A Markov-switching Vector Error Correction Model Approach," 2009 Conference, August 16-22, 2009, Beijing, China 51032, International Association of Agricultural Economists.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ags:nccest:37603. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.