Threshold cointegration and spatial price transmission when expectations matter
GianCarlo Moschini () and
Fabio Santeramo ()
Agricultural Economics, 2018, vol. 49, issue 1, 25-39
We examine the performance of the threshold cointegration approach, specifically Bandâ€ 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 threeâ€ regime cases are not identified as such. Results show that transfer costs are systematically underestimated, particularly in threeâ€ regime models. The speed of price transmission is also biased in threeâ€ regime models. Furthermore, inferences about occurrence of trade are poor, with estimated models suggesting far lower market integration than is true in the dataâ€ generating process.
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