Interfuel Substitution: Evidence from the Markov Switching Minflex Laurent Demand System with BEKK Errors

The Energy Journal (Forthcoming)

26 Pages Posted: 22 Jul 2019

See all articles by Apostolos Serletis

Apostolos Serletis

University of Calgary - Department of Economics

Libo Xu

University of San Francisco - Department of Economics

Date Written: June 28, 2019

Abstract

We investigate interfuel substitution in the United States using the minflex Laurent demand system and a century of data (from 1919 to 2012). We relax the assumption of constant parameters in the demand system, and also relax the homoskedasticity assumption, instead assuming that the covariance matrix of the errors is time-varying. Our results are consistent with theoretical regularity and indicate that the Morishima elasticities of substitution are always positive for all pairs of the energy goods (suggesting substitutability), but exhibit large swings across two regimes, generally being higher in the high demand volatility regime before the 1950s.

Keywords: Minflex Laurent flexible form; Markov regime switching; GARCH; BEKK

JEL Classification: C3; Q3

Suggested Citation

Serletis, Apostolos and Xu, Libo, Interfuel Substitution: Evidence from the Markov Switching Minflex Laurent Demand System with BEKK Errors (June 28, 2019). The Energy Journal (Forthcoming). Available at SSRN: https://ssrn.com/abstract=3422935

Apostolos Serletis (Contact Author)

University of Calgary - Department of Economics ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada
403 220-4091 (Phone)
403 282-5262 (Fax)

Libo Xu

University of San Francisco - Department of Economics ( email )

2130 Fulton Street
San Francisco, CA 94117-1080
United States

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