Extracting Long‐Run Information from Energy Prices ‐ The Role of Exogeneity

This article considers cointegration analysis to detect key features of long‐run structure in the gasoline market. The main purpose of this study is to investigate possible long‐run price leadership in the US gasoline market and the characteristics relevant to a competitive market using the vector error correction model. After examining the stationarity and cointegration properties of the weekly gasoline prices across eight different regions of the US we consider long‐run price leadership and parallel pricing in the framework of the cointegrated vector autoregression (VAR). In contrast with Kurita (2008) the complete market is considered using data on 901 weekly gasoline prices for the US. The finding of a single common trend has been observed for a smaller number of regions, but when the system is estimated across the US it is found that the cointegrating rank based on a broader range of prices implies two further common trends. One can be associated with at least one weakly exogenous variable and the others to cointegrating exogeneity and the tests of exogeneity suggest that the Gulf Coast, Mid West and West Coast gasoline prices are forcing rather than responding to the other regions in the long‐run