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Are retail prices of ethanol, gasoline and natural gas in the midwest cointegrated? An asymmetric threshold cointegration analysis

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  • Koto, Prosper Senyo

Abstract

This paper examines whether there is a long run equilibrium relationship, and the short run dynamic adjustment of such a relationship between the retail prices of selected transportation fuels in the Midwest. The study uses monthly data for the period October 2006 to December 2013. The analysis involves the nonlinear Threshold Autoregressive (TAR) and the Momentum Threshold Autoregressive (M-TAR) models of threshold cointegration, and the Momentum Threshold Vector Error Correction Models (M-TVECM), after pretesting for nonlinearities. The empirical results provide an unambiguous evidence of cointegration and asymmetric adjustments to the long run equilibrium relationship following deviations from the empirically estimated thresholds. There is robust empirical evidence of bi-directional Granger causality. There is empirical evidence that shocks to ethanol have lasting effects on gasoline prices than a corresponding shock to gasoline on ethanol prices. The empirical results have huge policy implications for the current debate on the future of the Renewable Fuel Standards (RFS) mandate in the United States.

Suggested Citation

  • Koto, Prosper Senyo, 2015. "Are retail prices of ethanol, gasoline and natural gas in the midwest cointegrated? An asymmetric threshold cointegration analysis," Journal of Economics and Business, Elsevier, vol. 77(C), pages 79-93.
    • Handle: RePEc:eee:jebusi:v:77:y:2015:i:c:p:79-93
    DOI: 10.1016/j.jeconbus.2014.09.004
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    References listed on IDEAS

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    Cited by:

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    2. Afees A. Salisu & Raymond Swaray, 2020. "Forecasting the Return Volatility of Energy Prices: A GARCH-MIDAS Approach," World Scientific Book Chapters, in: Stéphane Goutte & Duc Khuong Nguyen (ed.), HANDBOOK OF ENERGY FINANCE Theories, Practices and Simulations, chapter 3, pages 47-71, World Scientific Publishing Co. Pte. Ltd..

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    More about this item

    Keywords

    Ethanol prices; Natural gas; Gasoline prices; Threshold cointegration; Error correction model; Bi-directional causality; Renewable Fuels Standard (RFS);
    All these keywords.

    JEL classification:

    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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