Price Convergence and Cointegration

30 Pages Posted: 4 Mar 2012 Last revised: 17 Nov 2017

See all articles by Alfredo García-Hiernaux

Alfredo García-Hiernaux

Universidad Complutense de Madrid (UCM) - Department of Fundamentals of Economic Analysis II (Quantitative Economics)

David E. Guerrero

Universidad Complutense de Madrid (UCM) - Colegio Universitario de Estudios Financieros (CUNEF)

Date Written: November 15, 2017

Abstract

This paper provides a new, unified, and flexible framework to measure and characterize a convergence process. Specifically, we formally define the notion of price convergence and propose a model to represent a wide range of transition paths that converge to a common steady-state. Our framework enables the econometric measurement of such transitional behaviors and the development of testing procedures. In particular, we derive a statistical test to determine whether convergence exists and, if so, of which type: as catching-up or steady-state. The application of this methodology to historic wheat prices results in a novel explanation about the event that triggered the convergence processes experienced during the 19th century.

Keywords: Convergence, cointegration, law of one price, unit root

JEL Classification: C22, C32, N70, F15

Suggested Citation

García-Hiernaux, Alfredo and Guerrero, David E., Price Convergence and Cointegration (November 15, 2017). Available at SSRN: https://ssrn.com/abstract=1865964 or http://dx.doi.org/10.2139/ssrn.1865964

Alfredo García-Hiernaux

Universidad Complutense de Madrid (UCM) - Department of Fundamentals of Economic Analysis II (Quantitative Economics) ( email )

Campus of Somosaguas
Madrid
Spain

David E. Guerrero (Contact Author)

Universidad Complutense de Madrid (UCM) - Colegio Universitario de Estudios Financieros (CUNEF) ( email )

Serrano Anguita 9
Madrid, Madrid 28004
Spain

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