transmission cotton prices in domestic and external

Abstract

This article intends to verify the relationship between the internal and external prices in the cotton markets in order to test the validity of the Law of One Price over the July, 1996 to January, 2008 period. Monthly data were extracted from the Center of Advanced Studies for Applied Economy (Cepea) of Esalq / USP and from the Getúlio Vargas Foundation (FGVDADOS). The time series tests included the tests for unitary root and Johansen’s co-integration. Besides, the analytical framework also includes impulse-response function, the decomposition of the variance of the forecasting error and the vector error correction model (VEC). The results showed that the long-run variations in the international prices of cotton were fully transmitted to the domestic market. However, under constraints, the domestic and foreign markets are not perfectly integrated. Thus, these findings rejected the hypothesis of perfect integration between these markets. Therefore, the Law of One Price is not perfectly verified for the cotton markets in that period.