Price Adjustment Process Research Articles

Contemporaneous causality among office property prices of major Chinese cities with vector error correction modeling and directed acyclic graphs

PurposeThis study aims to investigate dynamic relations among office property price indices of 10 major cities in China for the years 2005–2021.Design/methodology/approachUsing monthly data, the authors adopt vector error correction modeling and the directed acyclic graph for the characterization of contemporaneous causality among the 10 indices.FindingsThe PC algorithm identifies the causal pattern, and the linear non-Gaussian acyclic model algorithm further determines the causal path from which we perform innovation accounting analysis. Sophisticated price dynamics are found in price adjustment processes following price shocks, which are generally dominated by the top tier of cities.Originality/valueThis suggests that policies on office property prices, in the long run, might need to be planned with particular attention paid to the top tier of cities.

How Do Remittance Inflows Cause the Dutch Disease in the Financial Sector? The Role of Financial Risk and Human Capital

This research examines whether the remittance (REM) inflows cause Dutch disease and how it affects financial development (FD). The sample consists of the top global REM recipients, namely China, Egypt, India, Mexico and the Philippines, based on the latest World Bank data from 1990 to 2019. This study employs three econometric models to evaluate the REM inflows’ impact on FD. Using the cross-sectionally augmented autoregressive distributed lag (CS-ARDL) estimation technique, we reveal that the REM inflows have impeded FD and have triggered Dutch disease issues in the financial sectors. Furthermore, the estimation found a positive effect of economic growth, globalization, human capital and financial risks on FD across all models, both in the short and long runs. In addition, the interplay among the REM, human capital, and financial risks also facilitates FD. The study suggests that robust resource flows and price adjustment processes tackle the hazard of deteriorating FD and emphasize the Dutch disease’s effects on the top REM recipients.

Threshold vector error correction model and transaction cost variation

ABSTRACT Our study assesses the performance of a threshold vector error correction model (TVECM) for the analysis of spatial price transmission. We specifically determine how inference about price regimes and the process of price adjustment to the established long-run equilibrium is affected when the stochastic transaction cost is exogenously or endogenously determined in fixed and flexible threshold models. The study first generates non-stationary but cointegrated price series and transaction costs based on true price transmission parameters: percentage of violations of spatial equilibrium, speed of price adjustment, threshold and inaction band using Monte Carlo simulations. Then, the generated data are used to estimate TVECMs under various assumptions on transaction cost variation and threshold specification. Finally, estimates of price transmission parameters are compared with the true parameters to evaluate the performance of model specifications. Our results indicate that the flexible TVECM accounting for transaction cost variation outperforms the standard fixed TVECM, which is consistent with findings from many previous studies in the literature. Our study also finds that although the flexible TVECM performs better than the fixed TVECM, it may not fully address the limitation of linear models when a real-world data represents a complex nonlinearity in the spatial price transmission.

An integrated vector error correction and directed acyclic graph method for investigating contemporaneous causalities

This study introduces an integrated vector error correction and directed acyclic graph method for investigating contemporaneous causalities with application to regional scrap steel prices in east, north, south, central, northeast, and southwest China. We use daily data and combine the Peter and Clark (PC) and Linear NonGaussian Acyclic Model (LiNGAM) algorithms to discover contemporaneous causalities. The vector error correction model shows each of the six series is part of cointegration relationships, and prices of north and southwest regions do not respond to long-run equilibrium disturbances. The PC algorithm shows the causal patterns, and the LiNGAM algorithm discovers the causal paths that enable the analysis of innovation accounting. Based upon impulse responses, we sort out sophisticated dynamics among price adjustment processes following shocks, for which north and southwest regions dominate price adjustment processes compared to the other four regions. The proposed approach provides short-term and long-term pricing policies for scrap steel throughout China.

Spatial Market Integration, Price Transmission and Transaction Costs in Major Onion Markets of India

The price information is one of the prime objectives of marketing strategies, and the farmers are unable to determine the marketing strategies without knowing the price movements of the agricultural commodities. In this context, the study has examined the spatial price integration among four major onion markets using the threshold vector error correction model (TVECM) that takes into account transaction costs in the price adjustment process. Augmented Dickey–Fuller and Phillips–Perron tests for unit root suggest that the time series is I(1). The application of the Johansen cointegration technique supports the presence of long-run price association and equilibrium in all pairs of onion markets. The Granger Causality test unveils that Bengaluru Granger causes all the markets except Kolkata. The Hansen and Seo supreme Lagrange Multiplier ( SupLM) test of linearity suggests that non-linear TVECM with one threshold and two regimes is best fit for the underlying data for three pairs of markets. While the rest of the three pairs, the SupLM test rejects the null of linearity, therefore, linear vector error correction model (VECM) is estimated. Finally, VECM and TVECM results reveal that Mumbai and Bengaluru are dominant markets in price formation in rest of the markets. Against these findings, it is suggested that the prices should be stabilised in the dominant markets so that the price shocks are not transferred to other markets. The threshold parameter, which is analogous to transaction cost, reveals the high transaction costs between the selected markets pairs, especially Mumbai and Delhi. One of the reasons for the high transaction costs may be the inefficiencies in infrastructure and communication. While a more correct explanation for this difference can be attributed to the differences in marketing fees, taxes, commission charges, license fees, etc., across the spatially separated agricultural markets. JEL Codes: Q1, Q13, D4, C22, D23

Bayesian Investor Belief Updating Speed and Market Underreaction to Earnings Announcements

AbstractBuilding on the Bayesian Theorem, we propose a multi‐period market microstructure model to understand how Bayesian investors underact new information and the duration of market underreaction. Applying the model to post‐earnings‐announcement drifts, our simulation and regression analyses show that the duration of the post‐announcement price adjustment process and the post‐announcement drifts can be explained by the new measure of belief updating speed that quantifies the uncertainties faced by Bayesian investors when incorporating new information into prices. Our study highlights the importance of incorporating the belief uncertainties of uninformed investors in explaining market underreaction in the Bayesian framework.

Analysis of Price Adjustment Payments for RCC T-Beam and Pre-stressed Bridges Construction Contracts

Purpose: Let’s compare and analyze the price adjustment payments for RCC T-beam and Pre-stressed bridges construction contracts for evaluation of the cost effectiveness of price adjustment payment. Design/Methodology/Approach: Based on Questionnaire survey and Official documents, comparison and analysis were done for RCC T-beam and Pre-stressed bridges construction contracts of price adjustment payment. Findings/Result: The weightage of price adjustment payment is 9% of total payment. This assessment was done to show the importance of price adjustment and its study in bridge construction contracts. As per GCC & SCC clause 53.7 of Standard Bidding Document, price adjustment is limited to 25%. Comparison of payments for price adjustments was done for different T-girder and pre-stressed bridges. Price adjustment payments for the computed price adjustment coefficients were calculated and compared with that of the actual payment made. Originality/Value: This research was mainly dedicated to deriving logical price adjustment coefficient ranges in making the price adjustment process for RCC T-girder and prestressed construction contracts economical. Paper Type: Research paper

Market integration and price transmission in wheat markets of India: a transaction cost approach

PurposeWheat, which is one of the major staple food grain crops in India, continues to depict occasional fluctuation in the prices though Union government has adopted administered price policy for wheat by intervening in its procurement at assured prices and distribution. Such fluctuations in prices are usually attributed to inefficient functioning of the agricultural markets. Since spatially separated markets also play an important role to determine efficiency of the agricultural markets, the study has used market integration as one of the tools to analyze the price transmission across the spatially separated markets to identify causes of price fluctuations and suggest ways to stabilize wheat prices.Design/methodology/approachThe study utilizes monthly wholesale prices for January, 2006 to May, 2016 for dara wheat. First, the study employs augmented Dickey and Fuller (ADF), Phillips and Perron (PP) and Kwiatkowski, Phillips, Schmidt and Shin (KPSS) tests to check stationarity in wheat prices. Second, Johansen's cointegration test is applied to assess the integration of wholesale prices between selected pairs of wheat markets to determine long-run relationship among them. Third, Granger casualty test is used to find the direction of causality between the wheat market pairs. Finally, threshold vector error correction model (TVECM) and likelihood ratio (LR) tests are employed to examine long-run adjustment of prices towards the equilibrium in selected wheat markets.FindingsSince wheat wholesale prices for the selected markets are found to be integrated of the order one, that is [I(1)], Johansen's test of cointegration is employed and its findings reveal that the selected wheat market pairs exhibit cointegration and show a long-run price association among themselves. There exists a bi-directional causality among the wheat market pairs. Since LR test is in favor of threshold model (except for Etawah–Delhi pair), one and two threshold models were also performed accordingly. Findings show that wholesale prices of wheat in Delhi markets remain higher than the prices of all other regional markets as regional markets are found to adjust their prices towards Delhi market. Distance of the wheat markets from each other is directly associated with threshold parameters, which are analogous to the transaction costs. Geographically dispersed wheat markets incorporate high transaction and vice versa.Research limitations/implicationsThe study argues that there is need to improve rural infrastructure and connectivity of the agricultural markets and remove market asymmetries through unified market regulating mechanisms across the states. This will enable price adjustment process from primary wholesale markets (in production regions) to the secondary wholesale markets (in scarcity regions) quickly.Originality/valueThe contribution of the study in the existing literature lies in the fact that there are no empirical evidences in the context of India that use price transmission as a tool of market integration among spatially separated wheat markets using TVCEM as this model examines role of transaction costs in efficient functioning of the agricultural markets.

Spatial market integration of rice in Bangladesh in the presence of transaction cost

Modeling transaction costs is of particular importance when analyzing price integration in developing countries. Spatial price integration among five major Bangladesh rice markets are examined over the post-liberalization period that covered a long time span from January 1999 to December 2021, the longest period covered ever. We account for nonlinear price adjustments induced by transaction costs using a threshold cointegration approach to account for the impact of transaction costs in the price adjustment process. Our results show that large price deviations from long-run equilibrium are corrected within 2–3 months. Our results provide strong supporting evidence of the presence of threshold effects, which means that large transaction costs contribute to slow equilibrium price adjustments. Thus, our results provide important policy implications for Bangladesh rice markets, namely that polices aimed at reducing transaction costs are needed to engender greater pricing efficiency in Bangladesh rice markets.

Contemporaneous causality among residential housing prices of ten major Chinese cities

PurposeThis study aims to investigate dynamic relationships among residential housing price indices of ten major Chinese cities for the years 2005–2021.Design/methodology/approachUsing monthly data, this study uses vector error correction modeling and the directed acyclic graph for characterization of contemporaneous causality among the ten indices.FindingsThe PC algorithm identifies the causal pattern and the Linear Non-Gaussian Acyclic Model algorithm further determines the causal path, from which this study conducts innovation accounting analysis. Sophisticated price dynamics are found in price adjustment processes following price shocks, which are generally dominated by the top tiers of cities.Originality/valueThis study suggests that policies on residential housing prices in the long run might need to be planned with particular attention paid to these top tiers of cities.

Monetary Policy and Asset Price Gap Signal Technology in a New Keynesian Framework

Abstract This article develops a New Keynesian model in which the inflation rate depends on the present value of future output gaps and asset prices gaps. The latter follows a price adjustment process. These asset price gaps are driven by ‛asset price gap signal technology’, a measure of exponentially distributed asset price gaps with a signalling mechanism. Within a dynamic stochastic optimisation approach, I identify a policy rule for the central bank in which the asset price gap the difference between the actual asset price at time t to its fundamental value plays a crucial role in determining the nominal rate of interest.

A Mean-Variance Optimization Approach for Residential Real Estate Valuation

Abstract This paper introduces a new approach to the sales comparison model for the valuation of real estate that can objectively estimate the coefficients associated with the explanatory price variables. The coefficients of the price adjustment process are estimated from the formulation of a quadratic programming model similar to the mean-variance model in the portfolio selection problem and are shown to be independent of the property to be valued. It is also shown that the sales comparison model should minimize the variance of the adjusted prices, and not their coefficient of variation as indicated by some national and international valuation regulations. The paper concludes with a case study on the city of Medellín, Colombia.

Nominal and real interest rates in OECD countries, changes in sight after covid-19?

In this article we seek to gain a better understanding of the decline in interest rates observed over the long term and we ask whether this trend is likely to stop or even reverse as a result of the covid crisis. For this, we introduce a model that combines an intertemporal framework and a price adjustment process. This model makes it possible to derive a testable relationship between observable macroeconomic variables. Tests carried out on a panel of 19 OECD countries confirm the influence of factors suggested by the theoretical model, in particular, the link between the fall in the interest rate and the economic slowdown. The covid episode is analyzed as a mixed shock of supply and demand. The exit from the covid crisis could be accompanied by a rebound, but rising real interest rates are not the most likely scenario.

Cointegration and spatial price transmission among rice markets in Tanzania: implications for price stabilisation policies

ABSTRACT In an effort to increase agricultural production, promote regional specialization and stabilize domestic food prices, the Tanzanian government has implemented several market-enhancing policies. The success of these measures depends, among other factors, on the cointegration and degree of price transmission across spatial markets. This study uses the vector autoregressive procedure of the Toda-Yamamoto causality test, dynamic ordinary least squares cointegration tests, and the asymmetric error correction model to examine the performance of Tanzania's domestic wholesale rice markets (lead-lag price relationship and long-run price adjustment process) during the post-agricultural market liberalization period. In response to changes in the marketing-enhancing policies during the investigation period, the presence of multiple structural breaks in the long-run equation is allowed. The results show that the Dar es Salaam market influences prices in all the rice markets examined, thus acting as a price leader. Furthermore, the price adjustment process results demonstrated the absence of asymmetric price adjustment between the central and regional wholesale rice markets, suggesting improved integration and efficiency of inter-regional rice markets. On the other hand, a central market's presence implies that interventions aimed at the central market can buffer regional markets to withstand adverse price shocks caused by food price spikes and volatility.

Adjusted repeated myopic use of the inverse elasticity pricing rule

It has been shown that repeated myopic use of inverse elasticity pricing rule converges on the profit maximizing price only if demand is sufficiently convex, and that it will never converge for linear or strictly concave demands (Fjell and Pal 2019). By myopic, we mean ignoring that elasticity and marginal cost may vary with output and price. We explore a price adjustment process, where at each stage the new price is a convex combination of the current price and the myopic price that is dictated by the inverse elasticity pricing rule. We show that as long as sufficient weight is placed on the current price, the price sequence converges on the profit maximizing price for all demands. The precise range of potential convex combinations for convergence are determined; both for the traditional (multiplicative) version of the inverse elasticity pricing rule, as well as for the unfamiliar additive version. A comparison of the two shows that the latter appears superior in the sense that it converges for a larger range of convex combinations, and that it seems simpler and more intuitive in its expression.

Pricing Efficiency in Agricultural Markets: Evidence from the Sugarcane Sector in Laos

This study aims to analyse the relationship between farm gate prices and export prices in the sugarcane sector in Laos. The Johansen cointegration test, Granger-causality test, and the Error Correction Model (ECM) were used to investigate the causality and asymmetry of price transmission between the two market levels. The coefficient of variation values shows that farm gate prices were more volatile than prices at the exporter level. Granger’s causality tests show two-way causality between farm and export markets. Further, estimates of the price adjustment process suggest an asymmetric adjustment between producer and exporter prices, in short and long-run. This implies that there is a non-competitive market structure. It is therefore recommended that policies be put in place to ensure the efficient marketing of sugarcane in Laos.

Weather-Induced Moods and Stock-Return Autocorrelation

Abstract Moods affect investors’ attention, memory, and capacity to process information. Inattentive investors delay the price adjustment process, thus leading to a positive autocorrelation of asset returns. In this study, I investigate the relationship between weather-induced moods and stock-return autocorrelation in the Stock Exchange of Thailand from January 2, 1991, to December 29, 2017. Only good moods contribute significantly to return autocorrelation.

Composite optimization for the resource allocation problem

In this paper, we consider resource allocation problem stated as a convex minimization problem with linear constraints. To solve this problem, we use gradient and accelerated gradient descent applied to the dual problem and prove the convergence rate both for the primal iterates and the dual iterates. We obtain faster convergence rates than the ones known in the literature. We also provide economic interpretation for these two methods. This means that iterations of the algorithms naturally correspond to the process of price and production adjustment in order to obtain the desired production volume in the economy. Overall, we show how these actions of the economic agents lead the whole system to the equilibrium.

The discrete separation theorem and price adjustment directions in markets with heterogeneous commodities

The separation theorem in discrete convex analysis states that two disjoint discrete convex sets can be separated by a hyperplane with a 0–1 normal vector. We apply this theorem to markets with heterogeneous commodities and uncover the mathematical structure behind price adjustment processes. When p is not an equilibrium price vector, i.e., when aggregate demand and aggregate supply are disjoint, the separation theorem indicates the existence of overdemanded/underdemanded items. This observation yields a generalization of Hall’s (1935) theorem and a characterization of equilibrium price vectors by Gul and Stacchetti (2000). Building on this characterization, we show that adjusting the prices of overdemanded/underdemanded items corresponds to Ausbel’s (2006) auction. We further extend our approach to markets with continuous commodities and uncover a striking connection between auctions and classical taˆtonnement processes.

Approximating Walrasian Equilibria

This paper proposes a price adjustment process that converges globally for a set of pure exchange economies, in which each agent has a Constant Elasticity of Substitution utility function. In this process, the auctioneer approximates demand schedules by assuming that each trader has a Cobb–Douglas utility function. The process generates prices that cannot be represented by linear combinations of previous prices, and hence precludes cycles. In the so-called unstable Scarf economies, prices spiral towards the Walrasian equilibrium in the same direction as found by Scarf. Simulation in large scale Scarf economies suggests that the speed of convergence may be polynomial in the size of the economy.