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Measuring market integration in the presence of transaction costs–a threshold vector error correction approach
Author(s) -
Meyer Jochen
Publication year - 2004
Publication title -
agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.29
H-Index - 82
eISSN - 1574-0862
pISSN - 0169-5150
DOI - 10.1111/j.1574-0862.2004.tb00269.x
Subject(s) - threshold model , econometrics , economics , transaction cost , error correction model , inference , econometric model , point (geometry) , market integration , statistical inference , computer science , microeconomics , statistics , mathematics , cointegration , artificial intelligence , geometry
Applied econometric analyses of market integration based on price data alone have been criticised because they neglect the role of transaction costs. To meet this objection, threshold vector error correction models are used. Threshold models can account for the effects of transaction costs in price transmission without directly relying upon information about these costs, which are often unavailable. It is argued that threshold models that are based on two thresholds provide results that are economically more intuitive than those obtained from one‐threshold models. However, to this point no adequate econometric test is available for threshold significance in a two‐threshold model; such tests are only available for the one‐threshold model. In this paper a restricted two‐threshold model is developed in which the significance of the thresholds can be tested. This model is therefore amenable to economic interpretation and statistical inference. The model is used to estimate market integration in the European pig market.

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