Semi-parametric models of spatial market integration

Abstract

We develop fully flexible, semi-parametric models of price linkages in spatially distinct regional US markets for plywood and lumber products. The models are developed within the framework of generalized additive models (GAM) which are estimated using penalized maximum likelihood estimation methods and generalized cross-validation techniques. Such nonlinear models are a natural extension to an extensive literature that has developed increasingly flexible models of the Law of One Price and spatial market integration. The GAM estimates and marginal responses to price changes exhibit substantial nonlinearities. Dynamic impulse responses demonstrate significant asymmetries in price responses to exogenous shocks. The results are largely consistent with efficiently linked regional markets for lumber and plywood products in that price transmission elasticities are generally close to unity and localized market shocks evoke equilibrating adjustments in regional markets.