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Testing for linear and threshold cointegration under the spatial equilibrium condition

  • Araujo-Enciso, Sergio Rene

Economic theory states that the spatial equilibrium condition is a region where prices can be or not cointegrated. It is when prices are within such a region when they are no cointegrated, when prices are in its boundaries they are not only cointegrated but also fulfilling the Law of One Price (LOP). Nonetheless the econometric techniques assume a mean reverting process in order to test for cointegration, either linear or non linear. This research shows that in the absence of such mean reverting process by using prices in pure equilibrium, cointegration (linear and non linear) is often rejected. Such findings go in line with the Band Threshold Autoregressive Model where the neutral band is a region of no cointegration. Furthermore it can be concluded that the economic concept of perfect market integration (LOP) by itself is not sufficient for testing cointegration with some of the current econometric methods.

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Paper provided by European Association of Agricultural Economists in its series 123rd Seminar, February 23-24, 2012, Dublin, Ireland with number 122545.

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Date of creation: 23 Feb 2012
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Handle: RePEc:ags:eaa123:122545
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  1. 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.
  2. Seo, Myunghwan, 2006. "Bootstrap testing for the null of no cointegration in a threshold vector error correction model," Journal of Econometrics, Elsevier, vol. 134(1), pages 129-150, September.
  3. Johansen, Soren, 2000. "Modelling of cointegration in the vector autoregressive model," Economic Modelling, Elsevier, vol. 17(3), pages 359-373, August.
  4. Hansen, Bruce E. & Seo, Byeongseon, 2002. "Testing for two-regime threshold cointegration in vector error-correction models," Journal of Econometrics, Elsevier, vol. 110(2), pages 293-318, October.
  5. 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.
  6. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
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