Estimating asymmetric price transmission with the error correction representation: An application to the German pork market

Abstract

Earlier attempts to test for asymmetric price transmission have been based on an econometric specification that is shown to be inconsistent with cointegration. An alternative specification based on the error correction representation is proposed and applied to transmission between producer and wholesale pork prices in northern Germany. Exogeneity conditions that are necessary for valid inference regarding asymmetry are tested. The analysis demonstrates that transmission between producer and wholesale pork prices in northern Germany is asymmetric. In accordance with common belief, the margin is corrected more rapidly when it is squeezed relative to its long-run level, than when it is stretched