A study on integration of black pepper (Piper nigrum L.) in domestic and intenational market

Market integration is one of the most important aspects that can be used to assess the impacts of market development and liberalization policies. This paper seeks to determine the existence of integration among the Domestic and International black pepper markets. By using Engle-Granger Test, examined the causality by Granger Causality tests and also captures the speed of adjustment to deviations in long run equilibrium by using Error Correction Model. Secondary data was obtained for average monthly prices of black pepper from January 2000 to December 2012. The result revealed that the Domestic and International markets were co-integrated. The Pairwise Granger causality test results were found that there exists unidirectional causality between the Domestic and International markets. Error correction coefficient was significant and its sign was negative, which implied that the domestic market price corrects to its previous period's disequilibrium by 14.63 per cent. Nowadays, market-based instruments such futures and options hedging, are advocated as efficient and effective alternative to mitigate the price instability. Besides of challenges such transaction costs, exchange rate risk, and the basis risk, arising when one attempt to use markets located in New York and London to hedge her outputs price from a developing country, there is a need to account for the role of changing macroeconomic policy.