Asymmetric Error Correction Models for the Oil-Gasoline Price Relationship

51 Pages Posted: 31 May 2005

See all articles by Matteo Manera

Matteo Manera

University of Milan-Bicocca, Italy - Department of Economics, Management and Statistics (DEMS); Fondazione Eni Enrico Mattei (FEEM), Milan, Italy

Margherita Grasso

University College London - Department of Economics

Date Written: May 2005

Abstract

The existing literature on price asymmetries does not systematically investigate the sensitivity of the empirical results to the choice of a particular econometric specification. This paper fills this gap by providing a detailed comparison of the three most popular models designed to describe asymmetric price behaviour, namely asymmetric ECM, autoregressive threshold ECM and ECM with threshold cointegration. Each model is estimated on a common monthly dataset for the gasoline markets of France, Germany, Italy, Spain and UK over the period 1985-2003. All models are able to capture the temporal delay in the reaction of retail prices to changes in spot gasoline and crude oil prices, as well as some evidence of asymmetric behaviour. However, the type of market and the number of countries which are characterized by asymmetric oil-gasoline price relations vary across models. The asymmetric ECM yields some evidence of asymmetry for all countries, mainly at the distribution stage. The threshold ECM strongly rejects the null hypothesis of symmetric price behaviour, particularly in the case of France and Germany. Finally, the ECM with threshold cointegration finds long-run asymmetry for each country in the reaction of retail prices to oil price changes.

Keywords: Oil prices, Gasoline prices, Asymmetries, Error correction models

JEL Classification: C22, D40, Q40

Suggested Citation

Manera, Matteo and Grasso, Margherita, Asymmetric Error Correction Models for the Oil-Gasoline Price Relationship (May 2005). FEEM Working Paper No. 75.05. Available at SSRN: https://ssrn.com/abstract=731524 or http://dx.doi.org/10.2139/ssrn.731524

Matteo Manera (Contact Author)

University of Milan-Bicocca, Italy - Department of Economics, Management and Statistics (DEMS) ( email )

Via Bicocca degli Arcimboldi, 8
Milan, 20126
Italy
+39 02 6448 5819 (Phone)
+39 02 6448 5878 (Fax)

HOME PAGE: http://www.matteomanera.it

Fondazione Eni Enrico Mattei (FEEM), Milan, Italy ( email )

Corso Magenta, 63
Milan, 20123
Italy
+39 02 520 36944 (Phone)

HOME PAGE: http://www.feem.it

Margherita Grasso

University College London - Department of Economics ( email )

Gower Street
London
United Kingdom

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