Endogenous-transition hidden Markov models of price linkages in postbellum wheat markets

We examine linkages among important wheat trading markets during the U.S. postbellum period. These markets underwent important improvements in infrastructure over this period, including the development of an extensive rail system. We utilize hidden Markov models with endogenous dynamics to evaluate these market linkages. This approach is unique in that the transition between hidden regimes is allowed to be dependent on contemporaneous market conditions. We find that larger deviations from parity underlie a transition between regimes, with one regime characterized by greater price volatility. During periods of greater deviations from price parity, the response of markets to such deviations is greater and occurs with faster equilibrating adjustments, as is indicated by smaller half-lives for parity deviations.