Considering threshold effects in the long-run equilibrium in a vector error correction model: An application to the German apple market

We propose a three-step procedure toestimate a regime-dependent vector error correctionmodel (VECM). In this model, not only the short-runadjustment process towards equilibrium is non-linear,as in threshold VECM and Markov switching VECMframeworks, but the long-run equilibrium relationshipitself can also display threshold-type non-linearity. Theproposed approach is unique in explicitly testing the nullhypothesis of linear cointegration against the alternativeof threshold cointegration based on the Gonzalo ANDPITARAKIS (2006) test. The model is applied to appleprice data on wholesale markets in Hamburg andMunich, using the share of domestic apples in totalwholesale trade as the threshold variable. We identifyfour price transmission regimes characterized bydifferent equilibrium relationships and short-runadjustment processes. This proposed approach isparticularly suitable for capturing irregular seasonalthreshold effects in price transmission typical for freshfruits and vegetables.