6.1 Major findings of the study
The basic aim of the thesis focused on improving existing MI tools in the light of theoretical diversities that underpin the MI concept; or suggestion of an alternative econometric tool to the analysis of market integration within equilibrium dynamics. The worthiness of the challenge has been viewed from the important role market integration findings play in trade and market policies. In order to propose an alternative tool to the existing ones, theoretical investigation was launched in sections two and three of the thesis to diagnose the sources of limitations that are associated with MI techniques. Basic market integration concepts and the two major non-linear methods used in MI studies were assessed within market equilibrium structures. The modeling and policy connotations for over generalising basic but crucial concepts in market theory were systematically and contextually explained. By unearthing the basic forms and sources of inter-markets non-linear structures, a theoretical foundation was built that links the structure of Markov switching models to equilibrium representation of inter-markets relations over time.
Theoretically, we have re-defined market integration as a process and outcome instead of
“process or outcome” that has driven existing methodologies. While the former is involving, it consistently fits the MI concept into the theory of multiple equilibria in time-space.
Consequences of ignoring the time series dimension of the inter-market processes on modeling estimates and how these can lead to a loss of insightful policy information have been
theoretically explained and demonstrated in a synthesized data analysis. Specifically in the theoretical frame the research has;
i) linked the conceptual complexities that are inherent within perfect market integration conditions to the two main (Eq/b-TAR) TC-based threshold effects that characterise commodity markets. Chapter two in particular explained the implications and appropriateness of tradability assumption within ESTJ spatial equilibrium theory under Walrasian transfer. While trade flow information is crucial in commodity markets analysis in general, the role of information flow in price transmission or arbitrage dynamisms, especially in present information age, calls for extra care in categorizing inter-markets conditions based on physical trade binary. For instance, when tradability holds without physical trade flow, inferring tradability by only physical trade flows in instances of imperfect integration can result in misleading conclusions of MI and ME.
ii) also asserted in section two that consistently analyzing inter-markets relations over time depends on the suitability of MI notion (outcome or process-based) assumed on the equilibrium system. The relationships between the law of one price, competitive spatial market equilibrium and implied efficiency, nature of arbitrage dynamics; and market integration within each modeling framework carry different economic implications. Thus depending on the nature of trade policy environment, distortions that characterise the markets and transactions costs involved in conducting trade, price series may behave in various ways of relationships. In price transmission and competitive market equilibrium modeling for instance, while transactions cost deter arbitrage to a certain threshold of price/rent variations between two market points, the behaviour of the long-run relationship between same markets in the face of economic uncertainties, policy changes or trade barriers may indeed be far from constant or linearity as may be implied by threshold processes.
iii) by noting the failures of existing models in specific market conditions, in section three developed a conceptual foundation within theoretical implications of ESTJ spatial equilibrium model and time dynamics of the equilibrating process. On the grounds that market integration can be assessed by arbitrage conditions (outcomes), i.e. no arbitrage, arbitrage failure or autarky ruling, a particular form (time-space) of multiple equilibria is
imposed on the equilibrating structure to represent the non-linearity defined by changes in arbitrage conditions over time. Since changes in such arbitrage conditions can be viewed in time dynamics from degree of rent irreversibility, it is in effect claimed that markets inter-relations fall within a complex dynamical system.
In order to infer inter-markets conditions from both the adjustment processes and the underlying data generation mechanism defined by arbitrage conditions (outcomes), we have proposed a Markovian forms of regime switching techniques, namely; MS/MC-VEM based on data availability. Methodologically the research has,
i) in chapter four, argued from the basic structures of HMMs representations and existing regime switching models of MI measurement that MS-(V)EM framework provide a basic unified front for MI analysis. This is based on the degree of dependence and nonlinearity of markets inter-relations defined by spatial market equilibrium and tradability concepts. Put differently, since market integration in its complete structure is assessed by arbitrage conditions (outcomes) we have theoretically imposed adjustment dynamics that correspond to each outcome-based equilibrium condition. This allows us to discriminate between real inter-market anomalies and those that are due to normal TC constraints, the so-called threshold effects, by considering neighbourhood conditions in time frame. This dwells on implicit rationale behind PTE, where basic representation of market integration is described by the adjustment parameters (especially of the ECT); and PBM, which considers how rent at time t differs from zero at expectation.
ii) in chapter five, demonstrated the strengths and flexibility of the proposed MS-VEM along conventional tools with a synthesized market data. Theoretical conceptualisations developed were reflected in the analysis. The basic b-TAR was taken as the basic frame of MI analysis within equilibrium settings. When the inter-market relations propagate on equilibrium structures with less dynamic adjustments, the PBM and HMM models work well with trade flow data (binary) to identifying the various market conditions. However, while trade flow information plays important role in market integration studies and in the vector representation, they tend to over-state market segmentation when tradability is not only driven by physical trade flow between the markets under consideration. In this case application of PTE models that condition arbitrage responsiveness on switching adjustment parameters and trade information in a pair-wise structure seems more appropriate to
capturing the true inter-market relations. Complications that can result from imposing crucial assumptions about b-TAR or Eq-TAR on the equilibrium structures that have driven the two non-linear methodological lines of MI analysis were also explained.