Rockets and feathers meet Joseph: Reinvestigating the oil-gasoline asymmetry on the international markets

TL;DR

This paper reexamines the oil-gasoline price relationship using advanced time series methods, revealing slow adjustment dynamics and limited asymmetry across most countries, with broader applicability for economic equilibrium analyses.

Contribution

It introduces new tests for asymmetry in price adjustments within a fractional integration framework, addressing limitations of standard error-correction models.

Findings

Most countries show no asymmetry in price adjustment.

Prices tend to revert slowly to equilibrium, indicating the Joseph effect.

The methodology can be applied to other markets with asymmetric dynamics.

Abstract

We reinvestigate the "rockets and feathers" effect between retail gasoline and crude oil prices in a new framework of fractional integration, long-term memory and borderline (non-)stationarity. The most frequently used error-correction model is examined in detail and we find that the prices return to their equilibrium value much more slowly than would be typical for the error-correction model. Such dynamics is usually referred to as "the Joseph effect". The standard procedure is shown to be troublesome and we introduce three new tests to investigate possible asymmetry in the price adjustment to equilibrium under these complicated time series characteristics. On the dataset of seven national gasoline prices, we report that apart from Belgium, there is no asymmetry found. The proposed methodology is not limited to the gasoline and crude oil case but it can be utilized for any asymmetric adjustment to equilibrium analysis.