Nonlinear adjustments in deviations from the law of one price for wholesale hog prices

Pei-Fen Chen and Chien-Chiang Lee ()

Agricultural Economics, 2008, vol. 39, issue 1, 123-134

Abstract: This article applies the Band‐Threshold Autoregression (Band‐TAR) model to investigate whether the law of one price (LOOP) holds in Taiwanese wholesale hog markets during the period from May 1987 through December 2003. We find evidence of a nonlinear mean reversion in deviations from the LOOP for relative hog prices. Our empirical study confirms the presence of thresholds and provides strong evidence in support of the view that the regional hog markets have been tightly integrated in Taiwan and that the wholesale hog market in Taiwan is an efficient market economy. Furthermore, the estimated half‐lives from the nonlinear generalized impulse response analysis are as short as four months.

Date: 2008
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