Studies in spatial market integration of the North American softwood lumber products have mostly focused on the question of whether prices in distinct market locations are cointegrated or not. However, the informational deficiencies in market integration studies were fulfilled in this analysis by examining a continuum of the degree of market integration rather than using the dichotomous approach whereby markets are deemed either integrated or not. Firstly, the methodology of permanent–transitory decomposition in a multivariate vector error correction model was used to estimate the cointegrating relationship of the North American markets for three categories of softwood lumber products: Spruce–Pine–Fir (SPF), Douglas fir (DF), and Hemlock fir (HF). Secondly, a consistent ranking of the degree of market integration was constructed by estimating the reaction time for prices to return back to the steady-state equilibrium, using generalized impulse response functions and persistence profiles. Our results indicate that the long-run price equilibrium relationship for all SPF and HF products is driven by both the production (in Canada) and consumption (in USA) sides of the markets, whereas that for DF products is driven by the consumption (USA) side only. Generally, the degree of market integration for HF products is lower than that for SPF products and higher than that for DF products.
Market integration and convergence to the Law of One Price: evidence from the European car market