Who is responsible for asymmetric fuel price adjustments? An application of the threshold cointegrated VAR model

Abstract

The purpose of the paper is to test the hypothesis about asymmetric price transmission between the fuel markets. The distribution chain is considered at three levels: the European wholesale market, the domestic wholesale market, and the domestic retail market. It is shown that between the European and domestic wholesale markets fuel prices adjust symmetrically and asymmetrically between the domestic wholesale market and the retail market. This finding confirms that the most probable cause of asymmetric price adjustments (especially in new EU member states) is the behaviour of petrol stations and not of oil companies. The empirical analysis is conducted using an appropriately modified Hansen-Seo method. The procedure, which has until recently been used to estimate bivariate threshold models, prevents the presence of the constant in the cointegrating vector entailing the risk of severe distortion of the estimation results. Moreover, the interpretation of a dummy variable present in the CVAR equation as a result of a data generating process distortion is limited by its presence in the cointegration space.

Extended Enders and Siklos test for threshold cointegration

“…The most frequent asymmetric relationships are those related to price transmission. Frey and Manera (2007) provided a broad overview of the existing literature on asymmetries in price transmission, finding that a threshold-type asymmetry is quite common in a wide range of markets, mainly financial - Martens et al (1998), fuel -Ghassan andBanerjee (2015), Leszkiewicz-Kędzior and Welfe (2014), Gosińska et al (2020), as well as the wheat market - Hassouneh et al (2017). Piłatowska and Włodarczyk (2017) showed a threshold error correction relationship between CO2 emissions and economic growth.…”