The estimation of threshold models in price transmission analysis
The threshold vector error correction model is a popular tool for the analysis of spatial price transmission and market integration. In the literature, the profi le likelihood estimator is the preferred choice for estimating this model. Yet, in certain settings this estimator performs poorly. In particular, if the true thresholds are such that one or more regimes contain only a small number of observations, if unknown model parameters are numerous or if parameters diff er little between regimes, the profi le likelihood estimator displays large bias and variance. Such settings are likely when studying price transmission. For simpler, but related threshold models Greb et al. (2011) have developed an alternative estimator, the regularized Bayesian estimator, which does not exhibit these weaknesses. We explore the properties of this estimator for threshold vector error correction models. Simulation results show that it outperforms the profi le likelihood estimator, especially in situations in which the pro file likelihood estimator fails. Two empirical applications - a reassessment of the the seminal paper by Goodwin and Piggott (2001), and an analysis of price transmission between German and Spanish markets for pork - demonstrate the relevance of the new approach for spatial price transmission analysis.
|Date of creation:||06 Dec 2011|
|Date of revision:||08 Oct 2012|
|Contact details of provider:|| Postal: Platz der Goettinger Sieben 3; D-37073 Goettingen, GERMANY|
Phone: +49 551 39 14066
Fax: + 49 551 39 14059
Web page: http://www.uni-goettingen.de/en/82144.html
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.:
- 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.
- 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.
- 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).
- 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.
- Tom Doan, . "RATS programs to replicate Hansen/Seo paper on threshold cointegration," Statistical Software Components RTZ00092, Boston College Department of Economics.
- Andrews, Donald W K, 1993.
"Tests for Parameter Instability and Structural Change with Unknown Change Point,"
Econometric Society, vol. 61(4), pages 821-56, July.
- Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
- Bruce E. Hansen, 2000.
"Sample Splitting and Threshold Estimation,"
Econometric Society, vol. 68(3), pages 575-604, May.
- 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.
When requesting a correction, please mention this item's handle: RePEc:got:gotcrc:103. 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: (Dominik Noe)
If references are entirely missing, you can add them using this form.