Asymmetric Error Correction Model Research Articles

Monetary policy, threshold of profitability and dynamics of private investment in the West African Economic and Monetary Union

This study investigates the interactions between optimal monetary policy, investment profitability thresholds, and private sector investment dynamics within the West African Economic and Monetary Union. Analyzing data from 2000 to 2021, it employs advanced econometric models (linear, asymmetric, and threshold effect dynamic panel error correction models) to provide a nuanced understanding of the investment environment in the union. The findings reveal the confluence of low returns and high borrowing costs for private investment. Notably, this study suggests that simply pursuing an expansionary monetary policy does not offer a sufficient solution. Instead, it proposes a more accommodative stance by the Central Bank, featuring lower policy rates, to alleviate the negative impact of high credit costs on private investment and ultimately stimulate economic activity.

International Oil Price and Domestic Refinery Price: Empirical Evidence for Greece

Fuel prices and the pronounced fluctuations in the international oil market are among the most widely discussed topics worldwide. Recent international developments, including energy crises, have resulted in a substantial surge in global oil prices, leading to price increases across all countries and in all petroleum products. This paper investigates the correlation between international oil prices and refining costs in Greece. More specifically, this study focuses on how rapidly refinery prices respond to potential increases or decreases in the international oil price, commonly known as the ’Rockets and Feathers’ phenomenon. The investigation assesses the reaction of diesel and gasoline refinery prices to fluctuations in the international oil price and explores the potential presence of asymmetry. The econometric model employed is based on an asymmetric error correction model, utilizing weekly data spanning from 2013 to 2022 for Greece. According to our findings, both diesel and 95-octane gasoline prices exhibit an asymmetric response to international oil prices. Notably, refinery prices react more promptly to price increases than to decreases in the global oil price. This study holds particular significance, as this delay is reflected in final retail prices, indicating the possible existence of pricing asymmetries. Additionally, the issue of oil purchase contracts arises, which guarantee a fixed price regardless of the prevailing international oil price at the time and, consequently, do not justify such fluctuations in refinery prices. These findings could prove valuable for competition policy within Greece’s vertical oil market.

Asymmetric Price Transmission between Crude Oil and the US Gasoline Market

Gasoline and crude oil price movements have been the focus of many studies in the last decade. We use the asymmetric error correction model (ERM) to examine the hypothesis of asymmetric pricing for both regular and premium gasoline markets at the US national level and in the four states with the highest gasoline consumption. Using weekly crude oil and retail gasoline prices from June 2000 to February 2023, the results show an asymmetric response in the gasoline market for all four states and at the national level. However, the adjustment speed tends to differ for the types of gasoline and across states. The implications of these results for policy and welfare are discussed in this study.

Impact of Exchange Rate on Trade Balance of India: Evidence from Threshold Cointegration with Asymmetric Error Correction Approach

In this research, we investigate the dynamic relationship between the trade balance and exchange rate in the case of India using threshold cointegration and an asymmetric error-correction model. Empirical results validate that the long-run dynamic relationship between the trade balance and exchange rates is asymmetric. In the short run, the trade balance responds only due to positive deviations in the exchange rate. In contrast, in the exchange rate model, the exchange rate reacts only due to negative deviations in the trade balance. In addition, the results exhibit that the adjustment following variation in the exchange rate seems higher than the adjustment in the trade balance in the short run. Besides, the results indicate that the speed of adjustment due to the positive and negative shocks differs in the trade balance and the exchange rate models. Further, the uni- directional Granger causality result suggests that the trade balance substantially affects the exchange rate. However, the Granger causality effect of the exchange rate on the trade balance seems minimal. Finally, our results validate the impact of momentum equilibrium adjustment path asymmetric effects between the trade balance and exchange rate, indicating that the adjustment path is asymmetric in the long run. Therefore, policy planners in India should consider the asymmetric adjustment between these two drivers to overcome trade balance discrepancies in the short and long run. JEL Codes: F40, F41, C22, C32, C12

Price transmission in shrimp production in Vietnam

Under the trade international integration, vertical price transmission in agri-food export supply chains is an essential issue that needs attention. This study analyses the price transmission from export prices to farm-gate prices of the black-tiger shrimp and white-leg shrimp production in Vietnam. Monthly price series of black-tiger shrimp and white-leg shrimp were collected from January 2015 to October 2020, from the Department of Aquaculture of Ca Mau, Soc Trang, Kien Giang, Ben Tre provinces; Vietnam Association of Seafood Exporters and Producers, and Vietnam market analysis and forecast joint stock company. The Johansen cointegration test, the Toda-Yamamoto Granger causality test, the Engle-Granger’s two-stage estimation, and the asymmetric error correction model using the Houck and Ward approach were applied. The results showed a long-term relationship between the farm-gate prices and export prices for both black-tiger shrimp and white-leg shrimp. The export prices were the price leader. In the long run, the price transmission from export prices to farm-gate prices in both black-tiger shrimp and white-leg shrimp was incomplete; however, the white-leg shrimp’s price transmission was noticeably better than black-tiger shrimp’s. In the short run, there was no statistically significant effect of export prices on farm-gate prices of black-tiger shrimp; while the price transmission of white-leg shrimp was significant but relatively slow rate. The price transmission for black-tiger shrimp and white-leg shrimp was symmetric in the short run and the long run. The findings of this study are useful for farmers in developing production and business strategy. Symmetric price transmission in both the short run and the long run is a positive signal for farmers to invest in sustainable production approaches and to meet stringent standard requirements of the export market.

Dynamics of the gas retail market under China's price cap regulation

To stabilise gas prices and safeguard consumer interests, China introduced a new price cap regulation for the gas retail market in 2013. This study is the first to evaluate the impact of this price cap regulation on the dynamics of retail gas prices. By using an asymmetric error correction model and Markov-switching regression based on daily gas-station-level price data from Inner Mongolia, China, we establish that retail prices respond asymmetrically to price caps, rather than crude oil prices, implying that price caps may serve as focal points for gas stations to collude tacitly. Additionally, the cyclic nature of retail prices is not obvious under the price cap regulation, which provides some evidence for the buffering effect of price caps on price cycles. Finally, we establish that price cycle characteristics differ by gas station and brand. These results may provide a better understanding of retail price dynamics in a price-cap-regulated market and guide policymakers and planners in optimising regulatory policies.

Increasing the productivity of shallot planting and its impact on the agricultural market, West Java.

The main objective of this study is to increase the productivity of shallot planting and its impact on the agricultural market. This study analyzes the transmission of shallot prices at the Caringin Main Market (wholesale) level with shallot prices at the farmer (producer) level using quantitative analysis of the Asymmetric Error Correction Model (AECM). The results showed that long-term transmission with positive ECT coefficients and negative ECT showed the same and significant positive values. Positive ECT is 0.286909 and negative ECT is 0.289266, where when there is a price deviation above and below the average balance line of onion prices at the farmer level, it takes three weeks to adjust to the balance of changes in shallot prices. The onion market at the wholesale or parent market occurs asymmetric price transmission from the wholesale price level (Caringin Main Market) to production prices (at the farmer level). A significant t-value of one percent evidences this. Asymmetric price transmission can be caused by abuse of market power.

ASSYMETRIC PRICE TRANSMISSION IN THE PORK MEAT MARKET: EMPIRICAL EVIDENCE

The aim of this paper was to evaluate the transmission of prices, in relation to asymmetry, between the producer, wholesale and retail levels of the most relevant pork meat consumption market in Brazil, the state of São Paulo. In order to attain the proposed objective, the Asymmetric Error Correction Model (ECM) was used. The importance of this subject is due to the relevance of the domestic pork meat market given the increase in production and the subsequent generation of employment and income, and in the unprecedented application of said model on this sector in the country. Results show that the transmission of prices in the São Paulo pork meat market takes place in an symmetric manner, indicating market efficiency in relation to the transmission of prices.

A new quadratic asymmetric error correction model: does size matter?

We introduce a new quadratic asymmetric error correction model that comprehensively accounts for both sign and size asymmetries. We also propose a test protocol that allows to rigorously identify different sources of long-run nonlinearity, namely quadratic nonlinearity, size asymmetry and sign asymmetry. We use a nonparametric residual recursive bootstrap technique to report p-values for the long-run tests. Simulation results confirm the consistency of our proposed estimator in finite samples and show that the bootstrapped tests have reasonably good size and power properties. Although our estimation of the Okun’s Law for the USA confirms previous findings on the direction of the sign asymmetry, its reveals that the magnitude of the impact of economic downturns on unemployment decreases faster than the impact of upturns. Forecasting results show that our new model performs better than NARDL.

Rockets and Feathers Revisited: Asymmetric Retail Gasoline Pricing in the Era of Market Transparency

In this paper, we revisit the empirical observation that prices rise like rockets when input costs increase but fall like feathers when input costs decrease. The analysis draws on a novel data set that includes daily retail prices of gasoline from 12,804 stations in Germany from January 1, 2014 to December 31, 2018. Our findings based on pooled-panel asymmetric error correction models indicate that the pattern of rockets and feathers is the norm rather than the exception. Our results further show that temporal aggregation of station-level price data leads to inaccurate inferences and could account for the inconclusive findings in the literature.

The determinants of crude oil prices: Evidence from ARDL and nonlinear ARDL approaches

This paper is an innovative attempt to empirically investigate the determinants of crude oil prices. The main objective is to distinguish between short- and long-term effects of some covariates on oil prices. The autoregressive distributed lag (ARDL) approach is applied to daily series spanning the period from January 2, 2003, to May 24, 2021, to analyze long-run relationships and short-run dynamics. The paper also focuses on the asymmetric effects of covariates and a nonlinear ARDL (NARDL) approach is used to explore this asymmetry. The use of an asymmetric error correction model with asymmetric cointegration provides new insights for examining the determinants of oil prices. All investigations of underlying oil price fluctuations are examined both before and in the COVID-19 pandemic. Our results, based on different econometric specifications, have key policy implications for policymakers both with and without COVID-19 potential considerations.

The Impacts of the Dollar-Renminbi Exchange Rate Misalignment on the China-United States Commodity Trade: An Asymmetric Analysis

Contrary to most existing studies of the literature that assumed that the effects of real exchange rate (RE) misalignment on trade flows are symmetric, this paper considers a more general and realistic framework allowing for possible asymmetric effects. We use monthly time-series data over the January 2002–October 2020 period from 66 two-digit industries that trade between China and the U.S. in order to avoid the well-known aggregation bias. Estimates of symmetric error-correction models (ECM) revealed that real dollar-renminbi rate misalignment has short-run effects on 35 US exporting and 53 US importing industries. These short-run effects translated into the long run in 18 and 17 industries, respectively. The numbers increased considerably when estimating asymmetric ECM. Indeed, short-run asymmetric effects were then found in 47 US exporting and 62 US importing industries, which translated into long-run asymmetric effects in 20 US exporting and 21 US importing industries. Our analysis highlights the importance of separating currency overvaluation from currency undervaluation in assessing the effects of the RE misalignment on trade flows between the US and China, and confirms that the impacts are industry specific. Our findings (robust to possible structural breaks) are useful for trading industries, and policymakers, and advocate accounting for asymmetries when examining the RE misalignment-trade flows nexus.

Asymmetric Price Transmission of Red Chili Market in North Sumatra Province, Indonesia

The high disparity in red chili prices between producer prices and consumer prices indicates that farmers and consumers do not benefit from the red chili trade, due to the long marketing channels and market power of intermediaries. Prices that fluctuate and do not reflect actual market conditions indicate the inefficiency of marketing agents is called asymmetric price transmission. This study aims to analyze the transmission pattern of red chili prices from producer to consumer level in North Sumatra Province. The analytical model used in this study is the Asymmetric Error Correction Model (AECM). The data used is secondary data that is systematically recorded in the form of monthly time series data from 2016-2020. The results showed that the price transmission between red chili marketing institutions in North Sumatra Province is asymmetric in the short term and long term in the wholesale-producer and wholesale-consumer relationships.

Testing for asymmetric cointegration of Italian agricultural commodities prices: Evidence from the futures-spot market relationship

The volatility of food prices still raises concerns among agricultural market players, increasing interest in the futures markets, thus calling for a better understanding of the connection between the futures and the Italian spot prices. This study uses symmetric and asymmetric vector error correction models to investigate the relationship between futures and spot prices for the Italian agricultural markets of soybean, corn, and milling wheat. The results confirm the leading role of the futures contract prices for all the considered commodities. Moreover, the non-linear cointegration analysis results suggest price transmission's asymmetries for all the agricultural commodity prices. This research provides critical insight into the shape of the futures-spot price transmission.

Price transmission between international and domestic prices in the Brazilian citrus sector

The orange juice chain is a representative sector of the Brazilian agribusiness sector and its performance warrants analysis to identify strategies to enhance its competitiveness. Analysis of asymmetry in food value chain is important because it provides valuable information on market structure and performance. We use an asymmetric threshold error correction model to examine threshold, short- and long-run asymmetries on price transmission from international to domestic prices of oranges in Brazil. We use monthly data on international frozen concentrated orange juice prices and domestic prices of oranges in Brazil for the period from January 1996 to December 2020 in the analysis. We find evidence of threshold and asymmetries in short- and long-run price transmission and asymmetric adjustment towards a long-run relationship between international and domestic orange prices in Brazil. Decreases in international prices that lead to reductions in marketing margins are passed on quickly to domestic prices, but this is not the case for increases in international prices. We discuss implications for the Brazilian citrus industry.

Symmetric and asymmetric adjustment of bank deposit interest rates: empirical evidence from Kenya

PurposeThis paper examines the sluggish adjustment of deposit interest rate categories with response to policy rate changes in a developing economy.Design/methodology/approachSymmetric and asymmetric error correction models (ECMs) are employed to test the pass-through effect and adjustment speed of deposit rates when above or below their equilibrium levels.FindingsThe findings reveal an incomplete pass-through effect in both the short run and long run while mixed results of symmetric and asymmetric adjustment speed across the different deposit rate categories are observed. Collusive pricing arrangement behavior is supported by deposit rate categories that adjust more rigidly upwards than downwards, while negative customer reaction behavior is supported by deposit rate categories that adjust more rigidly downwards than upwards.Practical implicationsEven though the findings indicate an aspect of increased responsiveness over the period, the sluggish adjustment of deposit rates imply that monetary policy is still ineffective and not uniform across the different deposit rate categories.Originality/valueTo the best of the authors' knowledge, this is the first study to empirically examine both symmetric and asymmetric adjustment behavior of deposit interest rate categories in Kenya. The findings are key to policy makers as they provide insights on how long it takes to adjust different deposit rate categories to monetary policy decisions. In addition, the behavior of deposit rates partly explains why interest rates capping was imposed in Kenya in 2016.

Asymmetry in Price Transmission: Evidence from the Wheat-Flour Supply Chain in Russia

Price volatility has serious implications for economic welfare of various agents in the grain supply chain. The paper examines asymmetric price transmission along the wheat producer-processor supply chain in Russia using log-transformed monthly prices during the period of 2000-2019. Having specified linear asymmetric vector error correction model, we exposed the long-term cumulative asymmetry in price transmission, however, the hypothesis of short-term symmetry presence failed to reject. The analysis revealed dominant position for wheat producers and wholesalers over the wheat processors. Imperfect competition and their resulting market power, as well as the existence of a huge number of illegal processors are the main causes for asymmetric price transmission on the Russian wheat market.

Spatial Price Dynamics and Asymmetric Price Transmission in Skim Milk Powder International Trade: Evidence from Export Prices for New Zealand and Ireland

A fast-changing global landscape highlights the importance of understanding spatial price dynamics in key international markets such as China, especially in the era of COVID-19 pandemic with international food trade and food system experiencing an unprecedented challenge. Nowadays, New Zealand’s dominant position in China’s dairy import market is being challenged by European Union (EU) dairy exporters leading to intensified market competition. Using monthly export data of skim milk powder (SMP), we applied threshold cointegration models along with asymmetric error correction models to examine spatial price dynamics and price transmissions of New Zealand and Ireland in Chinese and global markets. We found that New Zealand’s export prices retain their leadership position in China, Ireland’s export prices are well more aligned with those in international markets. In terms of own-country price transmission, Ireland’s relatively symmetric and swift adjustments were found to contrast with New Zealand’s SMP export prices, which displayed more asymmetric price transmissions.

The integration and efficiency of BRICS and Pakistan stock markets: An analysis using asymmetric cointegration and MF-DFA approaches

This study examines the asymmetric cointegration and efficiency between Pakistan and BRICS equity markets using monthly data from October 1997 to September 2018. The results reveal that the Brazilian stock market is the most efficient during the global financial crisis. Threshold and momentum threshold autoregressive models (TAR and M.TAR) confirm the presence of a long-run relationship between BRICS and Pakistan stock markets, where the speed of negative shocks is higher and significant for Pakistan Russian, Pakistan South Africa stock market pair. This infers quick adjustment of stock prices to negative shocks (bad news) as compared to positive shocks (good news). The speed of adjustment of positive shocks for Pakistan China is higher. The results of asymmetric error correction model (AECM) show results of unidirectional causality between Pakistan China and Pakistan Brazil stock market pairs, while bidirectional causality runs from Pakistan Russia, Pakistan India, and Pakistan South Africa stock market pairs. Thus the Pakistan stock market has short-run and long-run relationships with most other stock markets. Multi-fractal detrended fluctuation analysis supports long run efficiency of Brazilian markets during the global financial crisis. It suggests that investors pay keen attention to the Pakistan stock market when investing in BRICS stock market.

Study on the influence of international oil price on domestic oil price by APT-ECM

Based on the monthly data of soybean, soybean oil and soybean meal prices in China and the United States from 2006 to 2020, this paper applied the asymmetric error correction model (APT-ECM) to analyze the influence of international oil price on domestic oil price before and after Sino-US trade friction. The results show that: 1) the influence of international domestic soybean price on domestic soybean price is significant before and after Sino-US trade friction, while the influence of domestic price on international price is insignificant; 2) the impact of international soybean oil price on domestic soybean price is stable in the early stage but fluctuates evidently in the latter stage; 3) domestic soybean oil price is exposed to insignificant impact of international soybean oil price.