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Threshold cointegration and spatial price transmission when expectations matter

Sergio Lence, GianCarlo Moschini () and Fabio Santeramo ()

MPRA Paper from University Library of Munich, Germany

Abstract: We examine the performance of the threshold cointegration approach, specifically Band- 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 three-regime cases are not identified as such. Results show that transfer costs are systematically underestimated, particularly in three- regime models. The speed of price transmission is also biased in three-regime models. Furthermore, inferences about occurrence of trade are poor, with estimated models suggesting far lower market integration than is true in the data generating process.

Keywords: Band-TVECM; market integration; price transmission; threshold cointegration; transfer costs (search for similar items in EconPapers)
JEL-codes: C32 F17 Q11 (search for similar items in EconPapers)
Date: 2017-07-14
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Journal Article: Threshold cointegration and spatial price transmission when expectations matter (2018) Downloads
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