Testing the Law of One Price under Nonlinearity for Egg Market of Selected Provinces of Iran

Document Type : Research Article

Authors

• M. Ghahremanzadeh
• F. Faryadi Shahgoli
• Gh. Dashti

University of Tabriz

https://doi.org/10.22067/jead2.v29i4.48171

Abstract

Introduction: Regarding to the ever-increasing consumption of egg and consequently enhancement of its production during recent years, consideration to this output's market integration has special importance. Considering the fact that information on market integration may provide specific evidence as to the competitiveness of market, the effectiveness of arbitrage and the efficiency of pricing could be, likewise, useful to guide subsequent interventions aimed at improving the performance of market. In this context, in present study, validity of Law of One Price (LOP) will be tested in the egg market and among selected provinces.
Materials and Methods: Nonlinearity naturally extracted from local market due to existence of transportation and other transaction costs, so common cointegration test results are not suitable for market integration. In this study, at first, for being sure that series follow nonlinear behavior, Luukkonen et al. (1988) and BDS nonlinearity tests were used. Then for testing Law of One price in the egg market, nonlinear unit root test proposed by Emmanouilides and Fousekis (2012), which is an auxiliary regression for ESTAR model, was used. The data are daily retail prices of egg with the sample period ranging from April 2006 to march 2014 for north-west provinces of Iran including West Azerbaijan, East Azerbaijan, Ardebil, Tehran and Zanjan, which were obtained from State Live Stock Affairs Logistics Incorporated Company.
Results and Discussion: Based on the DF-GLS unit root test, the null hypothesis of unit root for egg price differentials was rejected. So, all series of price differentials are stationary. In the next step nonlinearity of price differentials of egg between two provinces was examined. In BDS test, at the beginning, an ARMA model was estimated then the test was carried out to the residual of estimated model with embedding dimension (m) 2-8 and the dimensional distance (ε) chosen equals to 0.5 and 2 times of standard deviation of the data. Based on the results from this test and Luukkonen et al. (1988) test, null of linearity was rejected and existent of nonlinear relation between series was confirmed. Then, existence of a unit root in price differential series was carried out by nonlinear method. The results showed that mentioned markets are well integrated and LOP holds in all market pairs in a way that strong version of LOP holds for all market pairs except Tehran-Ardebil that weak version LOP holds for them.
Conclusion: Results of this study showed that there is full transmission of shocks among selected provinces and implies that the markets considered are well integrated. It means that arbitrage activities profitably use existent opportunities and enhance economic efficiency. Moreover, the egg markets in selected provinces are taken into account as a unit market so if the government performs any kind of policy in one of these provinces (in the context of considered market), the effects of that policy will be transferred to other provinces and the welfare of consumers and producers in these provinces will be affected. Therefore, it is recommended to policy makers to regard this fact while they are choosing any new policy and to be aware of adopting the policies regionally.

Keywords

• Egg
• Law of One Price
• Market Integration
• Nonlinearity
• Nonlinear Unit Root Test

20.1001.1.20084722.1394.29.4.4.8

References

1- Akbarzadeh M. 2005. Market integration in rice market of Iran. 5th biennial Conference of Iranian Agricultural Economics. Zahedan. (In Persian).

2- Asche F., Bremnes H. and Wessels C. 1999. Product aggregation, market integration, and relationships between prices: An application to world salmon markets. Am. J. Agric. Econ. 81, 568–581.

3- Asche F., Gordon D.V. and Hannesson R. 2004. Tests for market integration and the Law of One Price: the market for whitefish in France. Marine resource economics. 19, 195–210.

4- Brock W. A., Dechert W. D. and Scheinkman J. A. 1987. A Test for independence based on the correlation dimension. Work. paper. Department of Economics, University of Wisconsin at Madison, University of Houston, and University of Chicago.

5- Chong T., Hinich M., Liew Khim-Sen V. and Lim K.P. 2008. Time series test of non-linear convergence and transitional dynamics. Econ. Lett. 100, 337– 339.

6- Cournot A.A. 1971. Researches into the mathematical principles of the theory of wealth. New York: A.M. Kelly.

7- Dumas B. 1992. Dynamic Equilibrium and the real exchange rate in a spatially separated world. The Review of Financial Studies. 5, 153–180.

8- Emmanouilides C.J., Fousekis P. 2012. Testing for the LOP under nonlinearity: an application to four major EU pork markets. Agricultural economics 43, 715-723.

9- Enders W. 1995. Applied Econometric time series. John Wiley, New York.

10- Fackler P.L. and Goodwin B.K. 2001. Spatial price analysis. In: Rauser G., Gardner B. (Eds.), handbook of agricultural economics. Elsevier Publishing, Amsterdam, NL, 971–1024.

11- Ghahremanzadeh M. and Mahmoodi H. 2013. Testing the market integration and central market hypothesis in the selected egg markets. Animal science Researches. 32(190), 179-190. (In Persian).

12- Ghosh M. 2010. Spatial price linkages in regional food grain markets in India. The Journal of Applied Economic Research 4, 495-516.

13- Goodwin B. and Piggott N. 2001. Spatial market integration in the presence of threshold effects. Am. J. Agric. Econ. 83, 302–317.

14- Goodwin B.K., Holt M.T. and Prestemon J.P. 2008. Commodity terms of trade, unit roots, and nonlinear alternatives: A smooth transition approach. North Carolina State University, Purdue University, USDA Forest Service. Online at http://mpra.ub.uni-muenchen.de/9684/

15- Goodwin B.K., Holt M.T. and Prestemon J.P., 2010. North American oriented strand board markets, arbitrage activity, and market price dynamics: A smooth transition approach. Department of Economics, Finance, and Legal Studies, University of Alabama

16- Heckscher E.F. 1916. “Vaxelkursens grundval vid pappersmyntfot.” Ekonomisk Tidskrift. 18, 309–312.

17- Hotelling H. 1929 "Stability in Competition." Econ. J. 39, 41-57.

18- Ihle R., Brümmer B. and Thompson S.R. 2009. Spatial market integration in the EU beef and veal sector: policy decoupling and export bans. Diskussions papiere. Department für Agrarökonomie und Rurale Entwicklung, No. 0913.

19- Kapetanios G., Shin Y. and Snell A. 2003. Testing for a unit root in the non- linear STAR framework. J. Econ. 112, 359–379.

20- Luukkonen R., Saikkonen P. and Ter¨asvirta T. 1988. Testing linearity against smoothtransition autoregressive models, Biometrika 75, 491–499.

21- Marshall A. 1920. Principles of economics, 8th Edition Macmillian London.

22- Marshall A. 1947. Principles of Economics. London: Macmillan.

23- Michael P., Nobay A.R. and Peel A.D. 1997. Transactions costs and nonlinear adjustment in real exchange rates: An empirical investigation. Journal of Political Economy. 105(4), 862-879.

24- Ministry Of Agriculture Jihad. Agricultural statistic, general office of statistics and information technology, Department of Economy and Planning. 2. Tehran.

25- Ministry of Commerce of Iran. 2010. Status of broiler market. Public relations of Ministiry of Commerce, Media Monitoring (16). (In Persian).

26- Moghadasi R., Khaligh P. and Ghalambaz F. 2011. The Law of one price in iran Agricultural Market (Case study: Barley, Rice and Cotton) Journal of Agricultural Extention and Education Research. 4(13), 41-51. (In Persian).

27- Mojaveryan M. and Amjadi A. 1997 Anlasying of Spatial markets integration and law of one one price. Journal of Agricultural Economics and Development. 18, 165-187. (In Persian).

28- Peng X. and Marchant M. 2003.Spatial price linkages between Chinese regional beef markets. Southern Agricultural Economics Association Annual Meeting.

29- Rasouli Z., Ghahremanzadeh M. and Dashti Gh. 2012. An analysis of price convergence in broiler market of Iran. Journal of Agricultural Economics and Development. 20(78), 1-21. (In Persian).

30- Serra T., Zilberman D., Gil J.M. and Goodwin B.K. 2011. Nonlinearities in the U.S. corn-ethanol-oil-gasoline price system. Agricultural Economics. 42, 35–45.

31- Sexton R.J., Kling C. L. and Carman H. F. 1991. Market integration, efficiency of arbitrage, and imperfect competition: Methodology and application to U.S. celery. American Agricultural Economics Association. 568-580.

32- Shahvali O. and Bakhshoodeh M. 2005. Investigating fish market integration in Iran. Quarterly Journal of Economics. 1, 69-85.

33- Stigler G.J. 1969.The Theory of price. London: Mac-millan.

34- Susanto D., Rosson C. and Adcock F.J. 2008. Market integration and convergence to the Law of One Price in the North American onion markets. Agribusiness. 24, 177–191.

35- Vinuya F. D. 2007. Testing for market integration and the law of one price in world Shrimp markets. Aqu Econ Man, 11, 243-265.

36- Wolszczak-Derlacz J. 2008. Price convergence in the EU—an aggregate and disaggregate approach. International Economics and Economic Policy.5(1), 25-47.

37- Zivot E. and Wang J. 2006. Modeling financial time series with S-PLUS. ISBN: 987-0-387-27965-7. http://www.springer.com.