Asymmetric error correction models for the oil-gasoline price relationship

The existing literature on price asymmetries does not systematically investigate the sensitivity of the empirical results to the choice of a particular econometric specification. This paper fills this gap by providing a detailed comparison of the three most popular models designed to describe asymmetric price behavior, namely asymmetric ECM, autoregressive threshold ECM and ECM with threshold cointegration. Each model is estimated on a common monthly data set for the gasoline markets of France, Germany, Italy, Spain and UK over the period 1985-2003. All models are able to capture the temporal delay in the reaction of retail prices to changes in spot gasoline and crude oil prices, as well as some evidence of asymmetric behavior. However, the type of market and the number of countries which are characterized by asymmetric oil-gasoline price relations vary across models. The asymmetric ECM prescribes that long-run price asymmetries are most likely to be found in the second stage of the transmission chain. Conversely, the ECM with threshold cointegration suggests that long-run price asymmetries vary across countries and markets. Short-run price asymmetries are captured by the asymmetric ECM specification and the TAR-ECM. The latter model suggests that all European countries are likely to be affected by asymmetries at the distribution stage, while the results obtained with the asymmetric ECM are mixed. (c) 2005 Elsevier Ltd. All rights reserved.