Testing for Asymmetric Pricing Behaviour in Irish and UK Petrol and Diesel Markets

Abstract

This paper empirically tests whether Irish and UK petrol and diesel markets are characterised by asymmetric pricing behaviour. The econometric assessment uses threshold autoregressive models and a dataset of monthly refined oil and retail prices covering the period 1994 to mid-2009. In addition to providing an appraisal of the existence of asymmetry in the Irish and UK markets, the paper provides an important methodological contribution. Tests of asymmetry in the literature normally partition the sample into periods of falling and rising international oil prices. This fails to account for price pressures coming from the equilibrium error of the cointegrating relationship. In particular, the possibility of conflicting price pressures arising from short-run dynamics in retail prices and responses to disequilibrium errors needs to be explicitly modelled. We take this issue into account in an econometric model and we highlight the importance of this distinction. In terms of the asymmetric behaviour of these markets, the paper finds no evidence to support the rockets and feathers hypothesis that prices rise faster than they fall in response to changes in the value of international oil prices.