TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

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METHODOLOGY DATA USED MAJOR FINDINGS DYNAMIC REGRESSION MODELS BASED ON A POINT LOCATION MODEL: COINTEGRATION Wang and Tomek, 2007 They investigate what seems to be inconsistency between price theory, which suggests that commodity prices should be stationary series, and tests for unit roots, which rather frequently imply that these prices are not stationary. Unit root tests are applied to nominal, deflated, log nominal, log deflated prices. Tests are run with and without a trend, and general to specific method for lag length is used. Williams and Bewley, 1995 They investigate the presence of arbitrage opportunities between four Australian cattle markets. Zanias, 1993 For four products (for which different levels of political support exist), they run cointegration tests amongst all possible pairs of countries for which data are available. Both the unrestricted and the restricted version of the LOP (where perfect price transmission is I posed) are tested. SWITCHING REGIME-THRESHOLD MODELS Balcombe et al., 2007 They use a threshold cointegration model which introduces a generalization on existing threshold models: the prices could be attracted to either the edge of the threshold interval or the to some point within the interval. They are estimated with a Bayesian approach. Monthly prices for corn, soybeans, milk, barrow, gilts, weekly prices for corn and soybeans. All in Illinois. CPI is used for deflating prices 1960-2005 Weekly cattle prices for 4 Australian markets (in logs) March 1986 - August 1989. Monthly prices from Eurostat, for soft wheat (1980:1- 1990:12), cow’s milk (1983:1- 1990:12), pig carcasses grade I(1986:1-1990:12), potatoes (1983:4-1990:12), for a number of countries, depending on data availability (BE,DE, FR,IT, NL, UK). All prices are expressed in ecu. Monthly Brazilian, US and Argentine prices for wheat (1988-2001), maize (1986- 2001), soybeans (1988-2001). All prices are used in logs and converted in US dollars. Annexes Results of unit root tests vary with their specification. Evidence favouring unit roots in commodity prices is not strong, even without accounting for structural breaks. . Arbitrage opportunities are usually short lived and long run equilibrium is restored, except for one market which is identified as a satellite market. The LOP holds in about half of the cases considered. For soft wheat markets, price comovement is found after prices have been corrected by Monetary Compensatory Amounts. The existence of a minimum intervention price is probably fundamental, but efficient arbitrage is also necessary. Evidence of thresholds is found in three out of the five commodity pairs investigated. The size of the thresholds depends upon the commodities considered. 135
Annexes METHODOLOGY DATA USED MAJOR FINDINGS SWITCHING REGIME-THRESHOLD MODELS Barrett and Li, 2002 They introduce a new methodology based on maximum likelihood estimation of a mixture distribution model incorporating price, transfer costs, and trade flow data. Four different regimes are developed according to the presence or absence of market efficiency and integration. Baulch, 1997 He develops the Parity Bound Model (PBM), an alternative methodology in which information on transfer costs is used in addition to prices. According to the size of price spreads and of transfer costs, three regimes are derived (within, at and outside the arbitrage band). Goodwin and Piggott, 2001 They evaluate corn and soybean markets in North Carolina; they use threshold autoregression and cointegration models to account for a neutral band representing transaction costs. Regime switching is triggered when deviations in prices exceed the “neutral band” represented by transport costs. The prices are analyzed in pairs. Negassa and Myers, 2007 The standard PBM model is extended to allow for dynamic shifts in regime probabilities (the probability of being in a particular trading regime is not time invariant) in response to changes in marketing policy. This allows to see whether changes in policies have increased or not spatial efficiency. 136 Monthly data on prices, trade flows, and estimated intermarket transaction costs for soybean meal over the years 1990-1996 for Canada, Japan, Taiwan and the United States. Monthly wholesale price (in levels) for Philippine rice coming from eight different markets. January 1980-June 1993. Daily corn and soybean prices in 4 North Carolina terminal markets. (in logs). 2 January 1992-4 March 1999. Weekly wholesale prices (in levels) converted into monthly prices for maize and wheat in eight Ethiopian markets. August 1996-August 2002. The methodology proposed, which is particularly useful when trade is discontinuous or bilateral and transfer costs are variable, is an attempt to bridge price and quantity based approaches to the study of price transmission, which allows to distinguish between market integration and efficiency. Competitive tradability and equilibrium conditions prevail in the market examined. Monte Carlo experiments show that the PBM is statistically reliable. An application to the Philippine rice markets demonstrates that the PBM detects efficient arbitrage when other tests do not. Results confirm the presence of thresholds and indicate support for market integration; threshold models suggest faster adjustments to disequilibrium than when threshold are ignored. Thresholds turn out to be bigger when there is a bigger distance between markets. The results highlight the importance of allowing for adjustment to policy changes.
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TESTING INTERNATIONAL PRICE TRANSMI
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Associazione “Alessandro Bartola
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Index 1 INTRODUCTION ..............
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1 INTRODUCTION The notion of “pri
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Introduction These recent phenomena
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Introduction Whereas the Common Agr
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Price Transmission and the Law of O
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3 EMPIRICAL TESTS FOR SPATIAL PRICE
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Empirical Tests for Spatial Price A
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= β 2 i0 Empirical Tests for Spati
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∆p + t ∑ ⎡β⎤ ' ⎡ p t =
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4 INTERNATIONAL SOFT WHEAT MARKETS
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International Soft Wheat Markets Un
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30.000 20.000 10.000 0 1961 1963 19
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250 200 150 100 50 1978:12 Internat
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5 EMPIRICAL ANALYSIS: COINTEGRATION
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Empirical Analysis: Cointegration M
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α LM test ARCH(13) Empirical Analy
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Page 113 and 114: Concluding Remarks These models rep
Page 116 and 117: REFERENCES Alderman, H., 1992. Inte
Page 118 and 119: References agricultural policies: s
Page 120 and 121: References Isard, P., 1977. How far
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Page 127 and 128: Annexes METHODOLOGY DATA USED MAJOR
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Page 141 and 142: Annexes Variable swfr 140 Table B.3
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Page 149 and 150: Annexes 148 Annex E - Unit root tes
Page 151 and 152: Annexes Table E.5 - Unit root tests
Page 153: The notion of “price transmission
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