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.     

Demand for transportation fuels in the oecd: A temporal cross-section specification

The determinates of the demand for transportation fuels interest many researchers and policymakers who are considering various energy plans. This paper uses a random coefficient regression approach to estimate the demand for gasoline, diesel fuel and jet fuel. For these three fuels a flow adjustment specification is assumed and for gasoline demand a stock adjustment model is also estimated. Individual European country data are used as the data because these data contain wide variations in the price variables, due to the different tax structures of the individual countries. These data are averaged across countries and time to produce firm estimates of the price and income elasticities of demand. For gasoline demand the estimates obtained from the European data are compared with estimates made by other researchers for the United States.     

Dynamic fuel price pass-through: Evidence from a new global retail fuel price database

We estimate the dynamic effects of crude oil price shocks on retail fuel prices, the pass-through, using the local projection approach of Jordà (2005). Using a novel monthly dataset of retail fuel prices in 162 countries over the period from 2000:1 to 2014:12, we find that: (i) retail gasoline prices respond positively to crude oil price shocks, but the responses vary across regions and income groups; (ii) there is also some variation across country groups in the persistence of the effects of crude oil price shocks on retail gasoline prices; and (iii) declines in crude oil prices lead to smaller effects on retail gasoline prices than increases in crude oil prices, pointing to an asymmetry in the fuel price pass-through.     

Testing for short and long-run asymmetric responses and structural breaks in the retail gasoline supply chain

This research examines the short-run and long-run relationship between the retail gasoline price, the spot gasoline price, and the price of West Texas Intermediate (WTI) crude oil along the gasoline supply chain. We find mixed evidence of short-run asymmetry in all stages of the retail gasoline supply chain. We fail to reject long-run symmetry at each stage of the retail gasoline supply chain. Additionally, we find a significant structural break in the crude oil-spot gasoline relationship after October 17, 2005. There is weak evidence of long-run oil price endogeneity after October 17, 2005. This structural change reverses the direction of short-run asymmetry between these two time series after the break. We find no significant structural break in the spot gasoline-retail gasoline relationship.     

Risk factors in oil and gas industry returns: International evidence

The recent boom in oil prices has attracted many investors to oil companies in search of both returns and diversification benefits. This analysis of the risk factors of investing in the oil and gas industry in 34 countries finds evidence that oil price is a globally priced factor for the oil industry. The oil and gas sector in developed countries responds more strongly to oil price changes than in emerging markets. Oil and gas industry returns also respond asymmetrically to changes in oil prices; oil price rises have a greater impact than oil price drops. There is no parallel to the asymmetry of oil price changes in other industries related to commodities. If there is any asymmetry, it is in the opposite direction from oil. Negative commodity price changes have a greater impact than positive ones. The results seem to indicate that the oil and gas industry is distinguished by a pass-through effect.     

Asymmetric volatility in European day-ahead power markets: A comparative microeconomic analysis

This paper uses high-frequency spot price data from fourteen wholesale electricity markets in Europe to analyze asymmetric volatility in European day-ahead power markets with Exponential GARCH (E-GARCH) and TARCH models. Our data set ranges from 1992 to 2015 and consists of approximately 926,000 observations. As such, this paper constitutes the most extensive and comprehensive work conducted so far on European power markets, to the best of our knowledge. Unlike most of the literature that treats price as a continuous variable and attempts to model its trajectory, this paper adopts a unique approach and regards each hour in a day a separate market. The results show, in post-2008 period, the most expensive electricity is consumed in Turkey, Ireland, and UK while the cheapest power is in Russia, Nordic countries, and Czech Republic. Russia, Poland, and Czech Republic have the least volatile markets while France, Ireland, and Portugal have the most volatile ones. Volatility has decreased in many European countries in post-2008 period. Besides, we find magnitude effect is usually larger than the leverage effect, meaning that the absolute value of price change is relatively more important than the sign of the change (whether it is an increase or a decrease) to explain volatility in European day-ahead power markets. Moreover, the results imply there is not a uniform inverse leverage effect in electricity prices; that is, price increases are more destabilizing in some European markets (e.g. Poland, Slovenia, Ireland, Netherlands) than comparable price decreases but vice versa also holds true in some other countries (e.g. Portugal and France). Leverage (or inverse leverage) effect in post-2008 period is relatively stronger in Portugal, France, and Ireland, but its impact is quite limited in Turkey and Germany. Furthermore, although the impact of seasonality on prices is obvious, a specific pattern cannot be identified. Finally, large changes in the volatility will affect future volatilities for a relatively longer period of time in Nordic countries, Ireland, and the UK while changes in current volatility will have less effect on future volatilities in Czech Republic, Russia, and Turkey.     

Asymmetry in retail gasoline and crude oil price movements in the United States: An application of hidden cointegration technique

There is a common belief that gasoline prices respond more quickly to crude oil price increases than decreases. Some economists and politicians believe that asymmetry in oil and gasoline price movements is the outcome of a non-competitive gasoline market requiring that governments take policy action to address “unfair pricing”. There is no consensus as to the existence, or nature, of the asymmetric relationship between prices of gasoline and crude oil. Much of this literature specifies asymmetry in the speed of adjustment and short-run adjustment coefficients. In contrast, Granger and Yoon's [Granger, C.W. and Yoon, G. “Hidden Cointegration”, University of California, San Diego, Department of Economics Working Paper, (2002).] Crouching Error Correction Model (CECM) identifies asymmetry of the cointegrating vectors between components (cumulative positive and negative changes) of the series. Applying the CECM to retail gasoline and crude oil prices for the U.S., we find that there is only evidence of cointegration between positive components of crude oil prices and negative components of gasoline prices. In contrast to the literature which attributes asymmetric price movements to market power of refiners, these findings suggest that gasoline prices –in the long run– are more influenced by the technological changes on the demand side than crude oil price movements on the supply side.     

Causes for an asymmetric relation between the price of crude oil and refined petroleum products

We revisit the issue of asymmetries in the relation between the price of crude oil and refined petroleum products in the United States. An econometric analysis of monthly data indicates that the asymmetric relation between the price of crude oil and motor gasoline is generated by refinery utilization rates and inventory behavior. The asymmetric relation between the price of crude oil and home heating oil probably is generated by contractual arrangements between retailers and consumers. Together, these results imply that price asymmetries may be generated by efficient markets. Under these conditions, there is little justification for policy interventions to reduce or eliminate price asymmetries in motor gasoline and home heating oil markets.     

Competition,regulation, and pricing behaviour in the Spanish retail gasoline market

The restructuring of the Spanish oil industry produced a highly concentrated oligopoly in the retail gasoline market. In June 1990, the Spanish government introduced a system of ceiling price regulation in order to ensure that “liberalization” was accompanied by adequate consumer protection. By 1998, prices were left to the “free” market. This paper examines the pricing behaviour of the retail gasoline market using multivariate error correction models over the period January 1993 (abolishment of the state monopoly)–December 2004. The results suggest that gasoline retail prices respond symmetrically to increases as well as to decreases in the spot price of gasoline both over the period of price regulation (January 1993–September 1998) and over the period of free market (October 1998–December 2004). However, once the ceiling price regulation was abolished, cooperation emerged between the government and the major operators, Repsol-YPF and Cepsa-Elf, to control the inflation rate. This resulted in a slower rate of adjustment of gasoline retail prices when gasoline spot prices went up, as compared with the European pattern. Finally, the Spanish retail margin was by the end of our timing period of analysis, as in the starting years after the abolishment of the state monopoly, above the European average. This pattern confirms our political economic hypothesis, which suggests that the Spanish government and the oil companies were working together in reducing the inflation, in periods of rising oil and gasoline prices. It is also inferred that explaining the pricing pattern in energy markets may require different hypothesis than the classical perspective, involving just firms taking advantage of market power.     

Gasoline prices,gasoline consumption,and new-vehicle fuel economy: Evidence for a large sample of countries

Countries differ considerably in terms of the price drivers pay for gasoline. This paper uses data for 132 countries for the period 1995–2008 to investigate the implications of these differences for the consumption of gasoline for road transport. To address the potential for simultaneity bias, we use both a country's oil reserves and the international crude oil price as instruments for a country's average gasoline pump price. We obtain estimates of the long-run price elasticity of gasoline demand of between − 0.2 and − 0.5. Using newly available data for a sub-sample of 43 countries, we also find that higher gasoline prices induce consumers to substitute to vehicles that are more fuel-efficient, with an estimated elasticity of + 0.2. Despite the small size of our elasticity estimates, there is considerable scope for low-price countries to achieve gasoline savings and vehicle fuel economy improvements via reducing gasoline subsidies and/or increasing gasoline taxes.     

European wood pellet market integration - A study of the residential sector

The integration of European energy markets is a key goal of EU energy policy, and has also been the focal point of many scientific studies in recent years. International markets for coal, oil, natural gas and electricity have previously been investigated in order to determine the extent of the respective markets. This study enhances this field of research to bioenergy markets. Price series data and time series econometrics are used to determine whether residential sector wood pellet markets of Austria, Germany and Sweden are integrated. The results of the econometric tests show that the German and Austrian markets can be considered to be integrated, whereas the Swedish market is separate from the other two countries. Although increased internationalization of wood pellet markets is likely to contribute to European price convergence and market integration, this process is far from completed.     

The role of information in retail gasoline price dispersion

Collecting information on prices is a costly endeavor. The cost depends on the relative ease with which those prices can be collected, and in many retail gasoline markets, there is a substantial divide in the ease of collecting information with regular grade gasoline on one side of the divide and midgrade and premium grade gasoline on the other. Regular grade prices are prominently displayed on large signboards in front of gasoline stations while the prices of higher octane grades, except where required by law, are rarely displayed. In this article, the effects of differential-by-grade price information on search and gasoline price dispersion are examined. A rank reversal test is used to test whether the observed grade-specific price dispersion is consistent with search or non-search related causes and, finding the former, a series of tests are presented to test for the effect of price information and other leading hypotheses. A significantly concave curvature in the price dispersion coefficients across the three grades supports a price information hypothesis. Detailed socioeconomic data on consumers, spatially matched to the stations they are most likely to patronize, shows that income is a secondary factor. Implications for policy are discussed.     

Convergence of European natural gas prices

Over the period 2015–2050 the consumption of natural gas of European OECD countries is expected to grow more than the consumption of any other energy source. Although these countries are interconnected and in most cases share a common currency, their wholesale national gas markets are highly heterogeneous. We study the determinants of cross-country convergence of natural gas prices for industrial consumers in fourteen European countries. Our empirical analysis is based on the notions of pairwise, relative and σ-convergence. We show that there is evidence of pairwise price convergence and that some key characteristics of gas markets, such as the existence of trading hubs and the degree of interconnection, are positively associated with the existence of a convergence process. This result carries over to the notion of σ-convergence and is robust to a number of changes in the implementation of the statistical tests. The analysis of relative convergence points to the existence of price-growth convergence, while price-level convergence is not supported by the data. Lastly, we assess the short-run implications of price convergence focusing on the speed of reversion to equilibrium after a system-wide shock hits the cointegrating relation.     

On the long run effects of market splitting: Why more price zones might decrease welfare

In liberalized electricity markets we observe different approaches to congestion management. While nodal pricing is implemented in Canada and some markets in the United States, European markets are split up into a limited number of price zones with uniform prices, in order to at least partially realize the benefits of regional price differentiation. Zonal boundaries often coincide with national borders, but some countries are also split into multiple zones. In this paper we shed light on possible negative welfare effects of market splitting that arise in a model where investment incentives in new generation capacity are taken into account if zones are misspecified. We show that standard approaches to configure price zones – on the basis of projected nodal price differences or congested transmission capacity – may fail to suggest reasonable zone specifications. Also an adjustment of Available Transfer Capacities (ATCs) between zones or a switch to flow-based market splitting does not ensure positive welfare effects. Our analysis suggests that a careful and detailed evaluation of the system is needed to ensure a reasonable zone configuration.     

Lifecycle analysis of different urban transport options for Bangladesh

Once again, sustained high oil prices are forcing policy makers in oil importing countries to consider alternatives to oil products as transportation fuels. Unlike in the past, advancements in technology, relative success of some experiments and increased familiarity among and acceptance by the public of some alternatives indicate a higher likelihood of success. In particular, natural gas offers a couple of the best options as compressed natural gas (CNG) and chemical conversion of natural gas into diesel (gas-to-liquids, GTL). These options are likely to be most attractive in countries that have cheap access to natural gas. We compare lifetime costs of several individual transportation options for Bangladesh, an oil importer with natural gas reserves. The results are then used to inform the natural gas policy debate in the country. Assuming a natural gas price of $1.5 per million Btu, both the CNG and GTL options are competitive with conventional gasoline/diesel cars if the oil price stays higher than $35–40 per barrel. If natural gas price increases after new upstream developments, CNG becomes less attractive while GTL remains competitive up to $2.5 if capital costs of GTL facilities decline as expected. Under a government policy push (lower discounting), the breakeven price of oil falls to $30–35 per barrel.     

Electricity liberalisation in Europe—how competitive will it be?

All the countries of Western Europe have taken steps to liberalise their electricity industries. Large consumers in every country can choose their electricity supplier, and in some countries, this choice has been extended to every consumer. The European Union has decided that from 2007 at the latest, all customers will be able to choose their electricity supplier. A number of large European electricity companies have been responding to this changing environment by merging with electricity companies in other countries. This means that while some national markets may not look unduly concentrated, concentration at the European level has been growing. This paper addresses the reasons for this, and asks whether the resulting industry structure will be sufficiently competitive to deliver gains from liberalisation.     

Estimating retail gasoline price dynamics: The effects of sample characteristics and research design

The study shows that much of the variation in the findings of the literature on retail gasoline price dynamics is systematic rather than sample variation from using different data. Estimates of pass-through rates depend systematically on research design and features of the data, such as the sampling frequency, the choice of upstream price, whether taxes are included or not, the sample length, and the postulated lag structure. In addition, there are systematic differences between time periods and countries. Using a 20 year-long dataset of 28 European Union countries we quantify the extent of estimate variation that arises from the choice of data structure, from temporal and country heterogeneity, and from sampling variation. Our findings inform the interpretation of results on pass-through rates derived from Error Correction Models. They are also of relevance for the broader literature estimating the transmission of price shocks in the economy.     

A time-varying copula approach to oil and stock market dependence: The case of transition economies

We employ the time-varying copula approach to investigate the conditional dependence between the Brent crude oil price and stock markets in the Central and Eastern European (CEE) transition economies. Our results show evidence of a positive dependence between the oil and the stock markets of the six CEE countries, which is indicative of a contagion between those markets, regardless of the changes in the oil price or the CEE stock index. Moreover, the dependence patterns in both the center and left tails of the return distributions change over time, particularly during the heart of the financial crisis, and are best described by the Survival Gumbel copulas. The empirical evidence also suggests that the lower tail dependence is much stronger than that of the upper tail, highlighting the importance of contagion during severe contractionary business cycles. Among the sample markets, Poland is shown to be particularly sensitive in this regard, while Hungary and Slovenia are the least sensitive.     

Anticipated and unanticipated effects of crude oil prices and gasoline inventory changes on gasoline prices

This paper examines the effect of anticipated and unanticipated changes in oil prices and gasoline inventory on US gasoline prices. We estimate empirical responses to anticipated and unanticipated changes in oil prices and gasoline inventory and show that gasoline price adjustments are faster and stronger for anticipated changes in oil prices and inventory levels than for unanticipated changes. Furthermore, this difference is statistically significant. We use these findings to evaluate the cost of adjustment hypothesis suggested by Borenstein and Shephard (2002). We also find that there is an asymmetry in the effect of gasoline inventory on gasoline and oil prices. This finding complements a well-known result that positive and negative changes in oil prices have asymmetric effect on gasoline prices.     

Trading behaviour on the continuous intraday market Elbas

Intraday markets for electricity allow for trading of energy until shortly before the period of delivery. This offers market participants a possibility to reduce their expected imbalances and to offer own unused flexibility. Because this form of distributed balancing before the period of delivery can be profitable for market participants as well as beneficial for system operations, intraday trading is expected to gain more importance in future, especially with increasing shares of variable renewable energy sources in the generation mix.So far, intraday markets are still a research field with many open questions. This paper contributes by a first analysis of intraday trades on Elbas, one of the European intraday markets. The analysis gives a detailed picture on trading activity and price development and is intended to improve understanding of continuous intraday trading.Findings include that trading activity differs significantly between price zones, that most trades occur in the last hours before gate closure and that market participants have to handle substantial price variations during the trading period. The paper also investigates the imbalance settlement rules in the Nordic countries and studies which effects one- and two-price imbalance settlement systems have on the market participants' profitability of intraday trading.