Considering threshold effects in the long-run equilibrium in a vector error correction model: An application to the German apple market

We propose a three-step procedure to estimate a regime-dependent vector error correction model (VECM). In this model, not only the short-run adjustment process towards equilibrium is non-linear, as in threshold VECM and Markov switching VECM frameworks, but the long-run equilibrium relationship itself can also display threshold-type non-linearity. The proposed approach is unique in explicitly testing the null hypothesis of linear cointegration against the alternative of threshold cointegration based on the Gonzalo AND PITARAKIS (2006) test. The model is applied to apple price data on wholesale markets in Hamburg and Munich, using the share of domestic apples in total wholesale trade as the threshold variable. We identify four price transmission regimes characterized by different equilibrium relationships and short-run adjustment processes. This proposed approach is particularly suitable for capturing irregular seasonal threshold effects in price transmission typical for fresh fruits and vegetables.

Issue Date:
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
Total Pages:

 Record created 2017-04-01, last modified 2017-04-26

Download fulltext

Rate this document:

Rate this document:
(Not yet reviewed)