Price convergence: Representation and testing

Alfredo Garcia-Hiernaux and David E. Guerrero

Economic Modelling, 2021, vol. 104, issue C

Abstract: This paper provides a new, unified, and flexible framework to measure and characterize a convergence process in time series. We formally define a general notion of price convergence, which encompasses convergence as steady-state and catching-up, and propose a model to represent a wide range of transition paths. Our framework enables the measurement of such transitional behaviors and the development of testing procedures. In particular, we use existing unit root tests (with and without breaks) to determine whether asymptotic convergence exists and, if so, its starting point and type: as steady-state or catching-up and in its weak or strong version. We illustrate the power and flexibility of the methodology with two different datasets with potential convergence processes: (1) the aggregated price level of the Eurozone's largest economies (Germany, France and Italy) after the introduction of the common currency and, (2) the transatlantic 19th Century wheat prices.

Keywords: Price convergence; Law of one price; Unit root with breaks; Regional and global markets; Applied time series econometrics (search for similar items in EconPapers)
JEL-codes: C22 C32 F15 N70 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:104:y:2021:i:c:s0264999321002303

DOI: 10.1016/j.econmod.2021.105641

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