Pricing-to-Market Using EGARCH-Error Correction Model

Baoying Lai and Nathan Lael Joseph
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Baoying Lai: University of East London, UK
Nathan Lael Joseph: Aston University, UK

International Journal of Strategic Decision Sciences (IJSDS), 2012, vol. 3, issue 1, 1-59

Abstract: In this paper, the authors use an exponential generalized autoregressive conditional heteroscedastic (EGARCH) error-correction model (ECM), that is, EGARCH-ECM, to estimate the pass-through effects of foreign exchange (FX) rates and producers’ prices for 20 U.K. export sectors. The long-run adjustment of export prices to FX rates and producers’ prices is within the range of -1.02% (for the Textiles sector) and -17.22% (for the Meat sector). The contemporaneous pricing-to-market (PTM) coefficient is within the range of -72.84% (for the Fuels sector) and -8.05% (for the Textiles sector). Short-run FX rate pass-through is not complete even after several months. Rolling EGARCH-ECMs show that the short and long-run effects of FX rate and producers’ prices fluctuate substantially as are asymmetry and volatility estimates before equilibrium is achieved.

Date: 2012
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