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Threshold cointegration and spatial price transmission when expectations matter

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  • Lence, Sergio
  • Moschini, Giancarlo
  • Santeramo, Fabio Gaetano

Abstract

We examine the performance of the threshold cointegration approach, specifically Band- TVECM, to price transmission analysis in an explicit context where trade decisions are made based on expectation of final prices, because trade takes time. We find that, following a standard inference strategy, a large portion of three-regime cases are not identified as such. Results show that transfer costs are systematically underestimated, particularly in three- regime models. The speed of price transmission is also biased in three-regime models. Furthermore, inferences about occurrence of trade are poor, with estimated models suggesting far lower market integration than is true in the data generating process.

Suggested Citation

  • Lence, Sergio & Moschini, Giancarlo & Santeramo, Fabio Gaetano, 2017. "Threshold cointegration and spatial price transmission when expectations matter," MPRA Paper 80202, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:80202
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    More about this item

    Keywords

    Band-TVECM; market integration; price transmission; threshold cointegration; transfer costs;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices

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