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German Rapeseed Oil and Biodiesel Pricing under Changing Market Conditions: A Markov-switching Vector Error Correction Model Approach

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  • Busse, Stefan
  • Ihle, Rico

Abstract

We analyze vertical price transmission in the German biodiesel market studying the relationship between rapeseed oil, soya oil and biodiesel prices. We focus on the period from summer 2002 to late 2007 during which the German biodiesel market developed into the largest market worldwide, mainly driven by political intervention. Tests on the adequacy of a traditional linear vector error correction model provide strong evidence against it and favor a regime-dependent model. We consider the Markov-switching vector error correction model which allows for parameter switching between regimes to be suitable for the question to be analyzed. We find two distinct regimes with differing error-correction behavior. Estimation results indicate that only rapeseed oil prices adjust deviations from the long-run equilibrium between the three prices. Error-correction is found to be strong until 2005; however, it substantially weakens in 2006 and 2007 due to market distorting policy measures such as blending obligations and norms requiring the use of rapeseed oil.

Suggested Citation

  • 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.
  • Handle: RePEc:ags:iaae09:51032
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    File URL: http://purl.umn.edu/51032
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    References listed on IDEAS

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    1. 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.
    2. 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 357-384, March.
    3. Peri, Massimo & Baldi, Lucia, 2008. "Biodiesel and vegetable oil market in European Union: some evidences from threshold cointegration analysis," 2008 International Congress, August 26-29, 2008, Ghent, Belgium 43971, European Association of Agricultural Economists.
    4. Ihle, Rico & von Cramon-Taubadel, Stephan, 2008. "A Comparison of Threshold Cointegration and Markov-Switching Vector Error Correction Models in Price Transmission Analysis," 2008 Conference, April 21-22, 2008, St. Louis, Missouri 37603, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    5. Kelvin Balcombe & George Rapsomanikis, 2008. "Bayesian Estimation and Selection of Nonlinear Vector Error Correction Models: The Case of the Sugar-Ethanol-Oil Nexus in Brazil," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(3), pages 658-668.
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    Cited by:

    1. Peri, Massimo & Baldi, Lucia, 2013. "The effect of biofuel policies on feedstock market: Empirical evidence for rapeseed oil prices in EU," Resource and Energy Economics, Elsevier, vol. 35(1), pages 18-37.
    2. Rezitis, Anthony N. & Pachis, Dimitris N., 2013. "Investigating the Price Transmission Mechanism of the Greek Fresh Tomato Market with a Markov Switching Vector Error Correction model," Agricultural Economics Review, Greek Association of Agricultural Economists, vol. 14(2), June.

    More about this item

    Keywords

    Biodiesel; cointegration; nonlinear vector error-correction model; regime dependent model; Markov-switching; Agricultural and Food Policy; Demand and Price Analysis; Resource /Energy Economics and Policy; C22; Q11; Q18;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy

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