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Cointegration and US Regional Gasoline Prices: Testing market efficiency from the Stationarity of price proportions
 University of Ireland
, 2012
"... Abstract: It is well known that oil price shocks are a major concern to the health of the global economy. Unstable oil prices have a significant negative impact on consumer confidence and business decision making. As a result economic recovery may be longer and more complicated. Controlling the glob ..."
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Abstract: It is well known that oil price shocks are a major concern to the health of the global economy. Unstable oil prices have a significant negative impact on consumer confidence and business decision making. As a result economic recovery may be longer and more complicated. Controlling the global oil price may not be possible, but a main concern of this research relates to energy market efficiency and as to whether relative price differences respond in an appropriate way across the region of one country. Here, the different geographic areas of a country are analysed to see whether they belong to the same market and result in the relative prices being stationary. The gasoline market in different regions of the US is analyzed. It is believed that if the gasoline market is sufficiently active in the US, then as a result of arbitrage, longrun gasoline prices by region should follow each other. In an efficient market, a price shock in one region would be reflected in all other prices. This proposition is tested in an effective manner by a barrage of stationarity tests. This is pertinent as such tests have been applied in antitrust cases in Italy and the Netherlands to determine whether there might be market imperfections or in association with more heuristic information, possible collusion.
Longrun Equilibrium Price Targeting
"... This article describes a characterisation of competitive market behaviour using the concepts of cointegration analysis. It requires all (n) …rms to set prices to follow a single stochastic trend (equivalently the vector of n prices should relate to cointegrating rank n 1). This implies that, in the ..."
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This article describes a characterisation of competitive market behaviour using the concepts of cointegration analysis. It requires all (n) …rms to set prices to follow a single stochastic trend (equivalently the vector of n prices should relate to cointegrating rank n 1). This implies that, in the long run, prices are driven by the shocks that impact on all companies, ruling out the possibility that the price set by any one …rm is weakly exogenous for the set of cointegrating vectors.
Arbitrage, Market Definition and Monitoring a Time Series Approach.
, 2012
"... This article considers the application to regional price data of time series methods to test stationarity, multivariate cointegration and exogeneity. The discovery of stationary price differentials in a bivariate setting implies that the series are rendered stationary by capturing a common trend and ..."
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This article considers the application to regional price data of time series methods to test stationarity, multivariate cointegration and exogeneity. The discovery of stationary price differentials in a bivariate setting implies that the series are rendered stationary by capturing a common trend and we observe through this mechanism longrun arbitrage. This is indicative of a broader market definition and efficiency. The problem is considered in relation to more than 700 weekly data points on gasoline prices for three regions of the US and similarly calibrated simulated series. The discovery of a single common trend is consistent with competitive pricing and a broad market definition, but the finding of a single weakly exogenous variable affects this conclusion.
Longrun Equilibrium Price Targeting
"... This article describes a characterisation of competitive market behaviour using the concepts of cointegration analysis. It requires all (n) firms to set prices to follow a single stochastic trend (equivalently the vector of n prices should relate to cointegrating rank n − 1). This implies that, in ..."
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This article describes a characterisation of competitive market behaviour using the concepts of cointegration analysis. It requires all (n) firms to set prices to follow a single stochastic trend (equivalently the vector of n prices should relate to cointegrating rank n − 1). This implies that, in the long run, prices are driven by the shocks that impact on all companies, ruling out the possibility that the price set by any one firm is weakly exogenous for the set of cointegrating vectors.