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Evidence about asymmetric price transmission in the main European fuel markets: from TAR-ECM to Markov-switching approach

Author

Listed:
  • José María Martín-Moreno

    (Universidad de Vigo)

  • Rafaela Pérez

    (Universidad Complutense de Madrid and ICAE)

  • Jesús Ruiz

    (Universidad Complutense de Madrid and ICAE)

Abstract

This paper presents new evidence on the existence of asymmetries in the transmission of shocks in oil prices in the main European fuel markets and their relation to the so-called rockets and feathers effect. Our approach differs from the existing literature in two ways: (1) the data used: we use forward prices rather than spot prices because fuel leaders use forward contracts to buy crude oil. (2) The methodological approach is different. We adopt a more sophisticated econometric model, the Markov-switching model, and use it to contrast the robustness of the results obtained with the TAR-ECM methodology with an endogenous threshold (nonzero threshold). In general, the results show evidence of an asymmetric response of gasoline and diesel prices to changes in the price of crude oil, both in the short-run and with respect to the adjustment towards long-run equilibrium. These price asymmetries fall in line with the “rockets and feathers” hypothesis.

Suggested Citation

  • José María Martín-Moreno & Rafaela Pérez & Jesús Ruiz, 2019. "Evidence about asymmetric price transmission in the main European fuel markets: from TAR-ECM to Markov-switching approach," Empirical Economics, Springer, vol. 56(4), pages 1383-1412, April.
    • Handle: RePEc:spr:empeco:v:56:y:2019:i:4:d:10.1007_s00181-017-1388-1
    DOI: 10.1007/s00181-017-1388-1
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    References listed on IDEAS

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    Cited by:

    1. Z. Bragoudakis & D. Sideris, 2021. "Asymmetric price adjustment and the effects of structural reforms and low demand in the gasoline market: the case of Greece," Journal of Applied Economics, Taylor & Francis Journals, vol. 24(1), pages 504-522, January.
    2. Holmes, Mark J. & Otero, Jesús, 2023. "Asymmetric behaviour and the 9-ending pricing of retail gasoline," Energy, Elsevier, vol. 263(PC).
    3. Zacharias Bragoudakis & Dimitrios Sideris, 2019. "Asymmetric price adjustment and the effects of structural reforms in a low income environment: the case of the gasoline market in Greece," Working Papers 274, Bank of Greece.
    4. Hamid Baghestani & Jorg Bley, 2020. "Do directional predictions of US gasoline prices reveal asymmetries?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 44(2), pages 348-360, April.
    5. Gallego, Camilo A., 2022. "Intertemporal effects of imperfect competition through forward contracts in wholesale electricity markets," Energy Economics, Elsevier, vol. 107(C).

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    More about this item

    Keywords

    Price asymmetries; Crude oil prices; TAR-ECM; Markov-switching estimation; “Rockets and feathers” behaviour;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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