When cointegration is interrupted: Price transmission analysis in the Italian dairy‐feed industry

Abstract

We analyze price transmission dynamics in the underinvestigated feed supply chain, applying a special case of the Threshold Vector Error Correction model where the cointegrating relationship is interrupted. Weekly Italian dairy feed and corn prices are used, finding evidence of asymmetric price transmission when the feed industry's margins are squeezed and highly volatile. The proposed Interrupted Threshold Cointegration model represents a valid complement to existing threshold and regimeswitching techniques, allowing for the application of an agile nonstructural error correction model when standard cointegration tests fail to detect any long-run relationship between price series.