Abstract
This paper examines the effect of anticipated and unanticipated changes in oil prices and gasoline inventory on US gasoline prices. We estimate empirical responses to anticipated and unanticipated changes in oil prices and gasoline inventory and show that gasoline price adjustments are faster and stronger for anticipated changes in oil prices and inventory levels than for unanticipated changes. Furthermore, this difference is statistically significant. We use these findings to evaluate the cost of adjustment hypothesis suggested by Borenstein and Shephard (2002). We also find that there is an asymmetry in the effect of gasoline inventory on gasoline and oil prices. This finding complements a well-known result that positive and negative changes in oil prices have asymmetric effect on gasoline prices.
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