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Evidence about asymmetric price transmission in the main European fuel markets: from TAR-ECM to Markov-switching approach

José María Martín-Moreno (), Rafaela Perez () and Jesús Ruiz ()
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José María Martín-Moreno: Universidad de Vigo
Jesús Ruiz: Universidad Complutense de Madrid and ICAE

Empirical Economics, 2019, vol. 56, issue 4, 1383-1412

Abstract: Abstract This paper presents new evidence on the existence of asymmetries in the transmission of shocks in oil prices in the main European fuel markets and their relation to the so-called rockets and feathers effect. Our approach differs from the existing literature in two ways: (1) the data used: we use forward prices rather than spot prices because fuel leaders use forward contracts to buy crude oil. (2) The methodological approach is different. We adopt a more sophisticated econometric model, the Markov-switching model, and use it to contrast the robustness of the results obtained with the TAR-ECM methodology with an endogenous threshold (nonzero threshold). In general, the results show evidence of an asymmetric response of gasoline and diesel prices to changes in the price of crude oil, both in the short-run and with respect to the adjustment towards long-run equilibrium. These price asymmetries fall in line with the “rockets and feathers” hypothesis.

Keywords: Price asymmetries; Crude oil prices; TAR-ECM; Markov-switching estimation; “Rockets and feathers” behaviour (search for similar items in EconPapers)
JEL-codes: C01 C51 D43 Q40 (search for similar items in EconPapers)
Date: 2019
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