Asymmetry
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Date
2012-03-29
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Abstract
This note resurrects a largely forgotten technique advanced by TWEETEN and
QUANCE (1969) for capturing price asymmetries. Their study employs dummy variables
that split up the price variable into two complementing explanatory terms capturing
either increasing or decreasing input prices. This approach is criticized by WOLFFRAM
(1971) for being mathematically incorrect. He proposes an alternative technique
based on price differences, which has since established itself as the primary method for
dealing with price asymmetry. We challenge WOLFFRAM’s critique and show that the
TWEETEN and QUANCE approach provides for a consistent estimation method that is
more readily interpretable than WOLFFRAM’s alternative.
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Keywords
decomposition approaches, irreversibility