Asymmetric threshold vertical price transmission in wheat and flour markets in Dhaka (Bangladesh): seemingly unrelated regression analysis

Author name: 
Mohammad J Alam
Raghbendra Jha

The analysis of price transmission for commodities requiring processing in vertical markets is challenged by fuzzy policy environments in the case of developing countries. However the analyses of threshold and asymmetries in price transmission at different levels of vertical markets provide a good indicator of market efficiency. The paper employs threshold cointegration that takes into account the asymmetric adjustment towards a long-run equilibrium and short-run price transmission. The paper investigates the non-linear price adjustment in short- and long-run in vertical markets of wheat and flour in Bangladesh. Using monthly wholesale and retail prices of wheat and flour for data from FAOStat for the period January 2008 to February 2016 we develop an asymmetry threshold error correction model for three vertical chains namely (i) wholesale and retail markets of flour, (ii) wholesale markets of wheat and flour, (iii) wholesale markets of wheat and retail markets of flour. We find evidence of threshold effects in vertical wheat-flour markets. The speed of adjustment towards the long-run equilibrium is different when the price deviations exceed the threshold value from when price deviations are below the threshold. Additionally, we find evidence of short-run price asymmetries implying that downstream price responds faster when upstream price increases than when the latter falls. This validates the hypothesis of rocket and feature principle in the wheat-to-flour markets in Bangladesh. Proximate reasons for these differences are discussed.

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