Wlazlowski, Szymon, Giulietti, Monica, Binner, Jane and Milas, Costas. (2012) Price transmission in the EU wholesale petroleum markets. Journal of Business & Economic Statistics , Vol.30 (No.2). pp. 165-172. ISSN 0735-0015

Abstract

This article employs nonlinear smooth transition models to analyze the relationship between upstream and midstream prices of petroleum products. We test for the presence of nonlinearities in price linkages using both weekly series constructed using official EU procedures and also daily industry series applied for the first time. Our results show that the estimated shape of the transition function and equilibrium reversion path depend on the frequency of the price dataset. Our analysis of the crude oil to wholesale price transmission provides evidence of nonlinearities when prices are observed with daily frequency. The nature of the nonlinearities provides evidence in support of the existence of menu costs or, more generally, frictions in the markets rather than supply adjustment costs. This result differs from that found for the U.S. petroleum markets.

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