TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...
TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...
TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...
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Annexes<br />
METHODOLOGY DATA USED MAJOR FINDINGS<br />
SWITCHING REGIME-THRESHOLD MODELS<br />
Barrett and Li, 2002<br />
They introduce a new methodology<br />
based on maximum likelihood<br />
estimation of a mixture distribution<br />
model incorporating price, transfer<br />
costs, and trade flow data. Four<br />
different regimes are developed<br />
according to the presence or absence<br />
of market efficiency and integration.<br />
Baulch, 1997<br />
He develops the Parity Bound Model<br />
(PBM), an alternative methodology in<br />
which information on transfer costs is<br />
used in addition to prices. According<br />
to the size of price spreads and of<br />
transfer costs, three regimes are<br />
derived (within, at and outside the<br />
arbitrage band).<br />
Goodwin and Piggott, 2001<br />
They evaluate corn and soybean<br />
markets in North Carolina; they use<br />
threshold autoregression and<br />
cointegration models to account for a<br />
neutral band representing transaction<br />
costs. Regime switching is triggered<br />
when deviations in prices exceed the<br />
“neutral band” represented by<br />
transport costs. The prices are<br />
analyzed in pairs.<br />
Negassa and Myers, 2007<br />
The standard PBM model is extended<br />
to allow for dynamic shifts in regime<br />
probabilities (the probability of being<br />
in a particular trading regime is not<br />
time invariant) in response to changes<br />
in marketing policy. This allows to see<br />
whether changes in policies have<br />
increased or not spatial efficiency.<br />
136<br />
Monthly data on prices, trade<br />
flows, and estimated intermarket<br />
transaction costs for<br />
soybean meal over the years<br />
1990-1996 for Canada, Japan,<br />
Taiwan and the United States.<br />
Monthly wholesale price (in<br />
levels) for Philippine rice<br />
coming from eight different<br />
markets.<br />
January 1980-June 1993.<br />
Daily corn and soybean prices<br />
in 4 North Carolina terminal<br />
markets. (in logs).<br />
2 January 1992-4 March 1999.<br />
Weekly wholesale prices (in<br />
levels) converted into monthly<br />
prices for maize and wheat in<br />
eight Ethiopian markets.<br />
August 1996-August 2002.<br />
The methodology proposed,<br />
which is particularly useful<br />
when trade is discontinuous<br />
or bilateral and transfer costs<br />
are variable, is an attempt to<br />
bridge price and quantity<br />
based approaches to the<br />
study of price transmission,<br />
which allows to distinguish<br />
between market integration<br />
and efficiency. Competitive<br />
tradability and equilibrium<br />
conditions prevail in the<br />
market examined.<br />
Monte Carlo experiments<br />
show that the PBM is<br />
statistically reliable. An<br />
application to the Philippine<br />
rice markets demonstrates<br />
that the PBM detects<br />
efficient arbitrage when<br />
other tests do not.<br />
Results confirm the presence<br />
of thresholds and indicate<br />
support for market<br />
integration; threshold models<br />
suggest faster adjustments to<br />
disequilibrium than when<br />
threshold are ignored.<br />
Thresholds turn out to be<br />
bigger when there is a bigger<br />
distance between markets.<br />
The results highlight the<br />
importance of allowing for<br />
adjustment to policy<br />
changes.