A Comparison of Threshold Cointegration and Markov-Switching Vector Error Correction Models in Price Transmission Analysis

Rico Ihle and Stephan von Cramon-Taubadel

No 37603, 2008 Conference, April 21-22, 2008, St. Louis, Missouri from NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management

Abstract: We compare two regime-dependent econometric models for price transmission analysis, namely the threshold vector error correction model and Markov-switching vector error correction model. We first provide a detailed characterization of each of the models which is followed by a comprehensive comparison. We find that the assumptions regarding the nature of their regime-switching mechanisms are fundamentally different so that each model is suitable for a certain type of nonlinear price transmission. Furthermore, we conduct a Monte Carlo experiment in order to study the performance of the estimation techniques of both models for simulated data. We find that both models are adequate for studying price transmission since their characteristics match the underlying economic theory and allow hence for an easy interpretation. Nevertheless, the results of the corresponding estimation techniques do not reproduce the true parameters and are not robust against nuisance parameters. The comparison is supplemented by a review of empirical studies in price transmission analysis in which mostly the threshold vector error correction model is applied.

Keywords: Agricultural; Finance (search for similar items in EconPapers)
Pages: 48
Date: 2008
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:nccest:37603

DOI: 10.22004/ag.econ.37603

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