Abstract:
Along the basic rationale of the Enke-Samuelson-Takajama-Judge spatial equilibrium theory
and the dynamic conceptualizations made from arbitrage processes, the study explores regime-switching
techniques in hidden Markov framework. This is motivated by complex non-linear structure inherent in
market integration processes, which is derived from multiple equilibria conditions, and transaction costs
constrained threshold autoregressive (TAR) effects. These place theoretical limitations on current time
series empirical models that are applied in market integration studies. In equilibrium representation, the
non-linearities imposed by both alternating rent levels and switching adjustment parameters are directly
accommodated. Two synthesized time series market data sets of varying levels of non-linear structures
are used to highlight the strengths and limitations of the Markov variants vis-à-vis the band-TAR models
that have currently dominated market integration analysis. The former model could capture alternating
adjustment processes implied by the relatively complex non-linear market data set while the later
produced mixed results
