Semi-Parametric, Generalized Additive Vector Autoregressive Models of Spatial Price Dynamics
An extensive empirical literature addressing the behavior of prices over time and across spatially distinct markets has grown substantially over time. A fundamental axiom of economics--the "Law of One Price"--underlies the arbitrage behavior thought to characterize such relationships. This literature has progressed from a simple consideration of correlation coecents and linear regression models to classes of models that address particular time series properties of price data and consider nonlinear price linkages. In recent years, this literature has focused on models capable of accommodating structural change and regime switching behavior. This regime switching behavior has been addressed through the application of nonlinear time series models such smooth and discrete threshold autoregressive models. The regime switching behavior arises because of unobservable transactions costs which may result in discrete trade/no trade regimes or smooth, continuous transitions among different states of the market. As the empirical literature has evolved, it has applied increasingly exible models of regime switching. For example, Goodwin, Holt, and Prestemon (2012) applied smooth transition autoregressive models to consider regional linkages in markets for oriented strand board lumber products. Enders and Holt (2012) examined commodity price relationships using a series of overlapping smooth transition functions to capture structural changes and mean shifting behavior. This literature has also involved an evolution in the methods for statistically testing structural change and regime switching behaviors. Chow tests with known break points have evolved into tests of discrete and gradual mean shifting with unknown break points and variable speeds of adjustment among regimes. These tests address the widely recognized problems associated with nonstandard test statistics and parameters that may be unidentified under null hypotheses. In this paper, we propose a new class of semi-parametric models that accommodate mean shifting behavior in a vector autoregressive modeling framework. We view this approach as a natural next step in the evolution of nonlinear time series models of spatial and regional price behavior. To this end, we consider recent advances in semiparametric modeling that have developed methods for additive models that consist of a mixture of parametric and nonparametric components. Our vector autoregressive models adopt the "Generalized Additive Models" (GAM) estimation procedures Hastie and Tibshirani (1986) and Linton (2000). In particular, we use the backfitting and integration algorithms developed for GAM model estimation to incorporate a non-parametric mean shift in the linkages describing individual pairs and larger groups of market prices. Our empirical specification involves simple and vector error correction models that relate price differences to lagged values of prices and price differentials. Our application is to daily data collected from a number of important corn and soybean markets at spatially distinct markets in North Carolina. These data have been previously utilized to evaluate regional price linkages and spatial market integration (see, for example, Goodwin and Piggott (2001)). We use generalized impulse response functions to evaluate the dynamics of regional price adjustments to localized shocks in individual markets. Implications for regional price adjustments and, in particular, adjustments during recent periods of high volatility, are discussed in the paper. Finally, we offer suggestions for further extensions of the semi-parametric analysis of regime switching behavior.
|Date of creation:||2013|
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- Barry K. Goodwin & Matthew T. Holt & Jeffrey P. Prestemon, 2011. "North American Oriented Strand Board Markets, Arbitrage Activity, and Market Price Dynamics: A Smooth Transition Approach," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 93(4), pages 993-1014.
- Obstfeld, Maurice & Taylor, Alan M., 1997.
"Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited,"
Journal of the Japanese and International Economies,
Elsevier, vol. 11(4), pages 441-479, December.
- 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.
- Obstfeld, Maurice & Taylor, Alan M., 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," CEPR Discussion Papers 1672, C.E.P.R. Discussion Papers.
- Obstfeld, Maurice & Taylor, Alan M., 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," Center for International and Development Economics Research (CIDER) Working Papers 233607, University of California-Berkeley, Department of Economics.
- Maurice Obstfeld and Alan M. Taylor., 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," Center for International and Development Economics Research (CIDER) Working Papers C97-088, University of California at Berkeley.
- 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.
- Goodwin, Barry K. & Piggott, Nicholas E., 1999. "Spatial Market Integration In The Presence Of Threshold Effects," 1999 Annual meeting, August 8-11, Nashville, TN 21489, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
- 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.
- Lo, Ming Chien & Zivot, Eric, 2001. "Threshold Cointegration And Nonlinear Adjustment To The Law Of One Price," Macroeconomic Dynamics, Cambridge University Press, vol. 5(04), pages 533-576, September.
- Haesun Park & James Mjelde & David Bessler, 2007. "Time-varying threshold cointegration and the law of one price," Applied Economics, Taylor & Francis Journals, vol. 39(9), pages 1091-1105. Full references (including those not matched with items on IDEAS)
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