Price Convergence and Cointegration
30 Pages Posted: 4 Mar 2012 Last revised: 17 Nov 2017
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: Suggested Citation