TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

METHODOLOGY DATA USED MAJOR FINDINGS
SWITCHING REGIME-THRESHOLD MODELS
Septhon, 2003
They expand Goodwin and Piggott
(2001) studies in three directions: they
use the direct multivariate test of
Hansen and Seo instead of a single
equation search to look for
confirmatory evidence; they use
Hansen tests to determine the number
of thresholds; they test for the
presence of non-linear cointegration.
Sexton et al., 1991
Their estimation is based on a
switching regression model with three
regimes (the direction of trade flows is
fixed, but arbitrage conditions might
be violated): efficient arbitrage,
relative shortage, relative glut. Only
price data are needed.
RATIONAL EXPECTATIONS MODELS
Goodwin et al., 1990
Typical analyses of the LOP
overlooks temporal elements of trade,
and assume that parity should hold
contemporaneously. They use two
different approaches to test the LOP:
GMM to estimate rationally formed
expected future prices (expectations
augmented version of the LOP);
nonparametric analysis of price parity.
Same as Goodwin and Piggott,
(2001).
Weekly prices (in levels) of US
celery in Florida and California
in 6 terminal markets.
January 1985-December 1988.
Monthly prices (levels) for 34
commodities from various
countries, all converted in
dollars.
The period considered is from
July 1973 to December 1985
(72 to 128 obs., depending on
the price).
Annexes
Their results indicate the
presence of one threshold in
most of the bivariate
commodity pairings, and are
supported by more general
tests of nonlinear
cointegration.
The methodology allows for
investigating market
integration, arbitrage
efficiency, magnitude of
marketing margins, product
substitutability, and market
competitiveness.
They conclude that using a
simple-augmented
expectations-model produces
greater support for the LOP
than using contemporaneous
prices. Results provide
strong support for a rational
expectations version of the
LOP. For the wheat market,
adherence to the standard
version of the LOP is limited
(only two out of six markets
support parity); for the
expectations augmented
version, the LOP is instead
rejected only in one case.
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