Market efficiency and price transmission: the case of Italian and US agricultural prices

The increasing co-movements between the world oil and food prices in the 2000s has prompted interest in the information transmission mechanism between the two markets. This research investigates the market integration and price transmission of some important agricultural commodities traded in a market area that includes United States and Italy for the period January 1999 to May 2012. US and Italian agricultural markets are connected by a consistent volume of trading and by the recognized influence of the CBT price signals on the Italian agri-commodity markets. This study extends the knowledge on the oil–agricultural commodity prices nexus (particularly for the Italian case) and on the price transmission dynamics from international (US) to domestic market (Italy). A multiple approach is applied starting from detecting structural breaks in the time series, proceeding with cointegration and price transmission analysis, to end with a causality approach. The results suggest that there is quite evidence of market integration between crude oil and US food prices with non linear causality direction going from oil to agri-commodity prices; cointegration and price transmission between US and Italian food prices suggest to accept the hypothesis of a unique price; there is no clear evidence of causality between oil and Italian agri-commodities, but evidence of linear causality from US to Italian agricultural markets, suggesting the oil price volatility is transmitted directly to the US agri-market and indirectly to the Italian one. Understanding the dynamics of the economy leads to better economic policies.