35 Indonesian government amended the log export ban policy, which allows for
export of several types of logwood.
Logwood Sample Split
Break Point
Plywood Sample split
Break Point
Sawn wood Sample Split
Break Point
Figure 8 The Results of Chow Test
5.5 Model Selection
According to the results of stability analysis, this study tries to consider the presence of structural changes to obtain more precise analysis. This is conducted
by introducing dummy variable in the standard VECM, which explains in which
36 point the structural break takes place. Based on the results of stability analysis,
there are several dummy variables which are developed in the analysis: 1 Dlog0912
, which implies the presence of structural break in the last quarter of 2009 for logwood model, and 2 Dsawn0609, which represents the presence of
structural break in the third quarter of 2006 for sawn wood model. Nevertheless, after introducing the dummy variables in the VECM for
logwood and sawn wood, this study only finds the significant parameter for dummy in the logwood model. While in the sawn wood model, the dummy
variable is statistically insignificant and also produces „strange‟ results of price transmission analysis, which might generate miss-understanding of interpretation.
In spite of introducing dummy variable in the model, for plywood model, this study does not include any dummy variable since based on the sample split chow-
test, it is found that all the parameters are stable and thus it does not show any structural break during the analysis, though this is contradictory with the results of
the break point chow-test. According to this, therefore, this study employs the standard ECM for plywood and sawn wood, which assumes all parameters to be
constants over time linear error correction model. Furthermore, the number of lags used in the error correction model refers to several criterions: Akaike
Information Criterion, Final prediction error, Hannan-Quin criterion, and schwarz criterion which are available in the software package.
5.6 The Results of Error Correction Model ECM
The results of error correction model for logwood, as shown in the table, do not find any statistically significant parameter from different market prices,
which indicates there is no short run response between domestic price and world price of logwood. As we can see in the table below, the dummy variable i.e.
Dlog0912t-1 is statistically significant at any level of significance, which
implies that there is a structural break in the last quarter of 2009. Based on this result, it is estimated the different speed of adjustment of price transmission
between world and domestic price of logwood before and after the break period. Both before and after the break period, it is estimated that the speed of adjustment
of the domestic logwood price to correct market disequilibrium is slower than the
37 speed of adjustment of the world logwood price. Before the last quarter of 2009,
the speed of adjustment of the domestic logwood price to correct market disequilibrium is 5.8 percent, whereas the speed of adjustment of the world
logwood price is 10.3 percent. Meanwhile, after the last quarter of 2009, the speed of adjustment of the domestic logwood price is 1.2 percent higher than that before
the break period, as well as the speed of adjustment of the world logwood price becomes 2.2 percent higher.
In addition, the estimated price adjustment of half-lives which implies the length of time required to adjust for half of the deviations from long-run market
equilibrium before the last quarter of 2009 is calculated at about four months, and becomes faster after the last quarter of 2009 at about 3.19 months.
Generally, the results from VECM do not confirm the Granger-causality test which tells there is
no causality between the domestic logwood price and the world logwood price.
Table 7 Error Correction Model for Logwood Variable
Parameter Variable
Parameter Δdlt
Δrwlt ectt-1
-0.058 ectt-1 0.103
Δdlt-1 0.019
Δdlt-1 -0.094
Δrwlt-1 0.010
Δrwlt-1 0.445
Long run
dlt-1 Intercept
rwlt-1 0.0723
Dlog0912t-1 -0.211
Trendt-1 0.005
The results of error correction model for plywood market, as shown in the table, show a bit different finding than those in the logwood market. It is indicated
that in the short-run, the response of the domestic plywood price to the world plywood price changes is estimated to be 3.7 percent, whereas the response of the
world plywood price to the domestic plywood price changes is much higher : 23.2
38 percent.
Furthermore, the speed of adjustment of the domestic plywood price is also slower than the speed of adjustment of the world price: 6.3 percent and 7.9
percent respectively. Based on this result, the estimated price adjustment of half-
lives is a bit similar with that in the logwood market. Contradictory with the results in the logwood market, the VECM confirms the results of Granger-
causality test which emphasizes the reciprocal causality from both domestic and world plywood price.
Table 8 Error Correction Model for Plywood Variable
Parameter Variable
Parameter Δdpt
Δrwpt ectt-1
-0.063 ectt-1 0.079
Δdpt-1 0.405
Δdpt-1 0.232
Δrwpt-1 0.037
Δrwpt-1 0.206
Long run
dpt-1 Intercept
2.102 rwpt-1
0.594 Trendt-1
0.004
The error correction model for sawn wood market shows some different findings compared to logwood and plywood market. It is estimated that in the
short-run, there is only response from the world price to the price changes of the domestic price, but the domestic price of sawn wood will not give any response to
the changes in the world price. This short run response of the world price is quiet high: 29.4 percent, which is statistically significant at any level of significance.
Furthermore, the speed of adjustment of the domestic sawn wood price to correct the market disequilibrium is faster than the speed of adjustment of the world sawn
wood price: 7.02 percent and is 3.7 percent respectively. This situation is different with that in the logwood and plywood market which estimates that the speed of
adjustment of the domestic price is slower than that of the world price. In addition, the estimated price adjustment of half-lives is calculated at six months.
39 Similar to the findings in the plywood model, the VECM confirms the results of
Granger-causality test as well, which emphasizes both the domestic and the world price have an influence to each other.
Table 9 Error Correction Model for Sawn wood Variable
Parameter Variable
Parameter Δdst
Δrwst ectt-1
-0.072 ectt-1 0.037
Δdst-1 0.277
Δdst-1 0.294
Δrwst-1 -0.070
Δrwst-1 0.119
Long run
dst-1 Intercept
3.509 rwst-1
0.350 Trendt-1
0.004
5.7 Residual Analysis
