Testing for the law of one price: rice market integration in Bangladesh

Recent studies of spatial market integration have adopted error correction models to test for its existence and for market dominance. An integrated empirical framework is proposed here which tests for long‐run spatial market integration between price pairs using a dynamic vector autoregressive model and cointegration. Hypotheses tests of market integration, perfect market integration, and causality are conducted sequentially. The approach is illustrated using monthly prices from rice markets in Bangladesh since trade liberalisation in 1992. Results show that rice markets are perfectly integrated and that Dhaka dominates near markets but is dominated by more distant markets.