Delineation of the

UK Seafood Markets

by

Patty Clay
Abdulai Fofana

*Management Division,
Scottish Agricultural College
Craibstone Estate, Bucksburn, Aberdeen, AB21 9YA Scotland

December 1998

SAC Management Division Working Paper No.

FAIR Project CT96-1814
DEMINT
“The implications for fisheries management systems
of interactions between farmed and wild caught species”

1
Introduction

The concept of cointegration has been increasingly applied in fish market delineation studies in
recent years (see for example Asche and Steen 1998; Asche, Salvanes and Steen 1997; Gordon,
Salvanes and Atkins 1993). Studies that have used the technique for the express purpose of
delineating the UK fish market however, are non-existent. The UK market for fish and fish
products includes a wide variety of species, which is growing with the introduction of
aquaculture and the growth in global trade. Seafood products range from low-value species such
as herring and mackerel, to high-valued species such as salmon and shellfish. However, the
market position of many fish products is changing along with changes in consumer tastes and
buying behavior, making it difficult to get a clear picture of the exact nature of substitution
within the fish markets. In this report, we apply cointegration analysis to discern which species
in the UK can be said to belong to the same market, and therefore which species compete with
each other.

A prerequisite to examining the relationship between products is the defining of the market for
the product. The market can be defined as "the area within which price is determined..." (Stigler
and Sherwin, 1985), giving price the principal role in defining market boundaries. It is generally
accepted in economic theory that two products, or two varieties of a product (i.e. species of fish),
can be classed in the same product group if they are close substitutes. Stigler and Sherwin (1985)
describe substitute products as those which are 'in the same market' and whose relative prices
'maintain a stable ratio'. A necessary condition for two products to be substitutes therefore is
that they are in the same market. Additional to this, the prices of the products must be part of a
long-run equilibrium system, for this ensures that while their relative prices may deviate in the
short-run due to stochastic supply and demand shocks, a stable ratio will be reached in time. If
the products are not substitutes (or complements), there will be no market forces working to re-
equilibrate the price ratio after a shock occurs in the market.

Cointegration theory is consistent with Stigler’s definition of market and the general behavior of
market prices. It has been witnessed that most macro-economic time series data are inherently
nonstationary. For nonstationary data series, cointegration is the only circumstance when these
form a stable long-run relationship (Asche and Steen, 1998). In this study we use the Johansen
cointegration method to test for price cointegration because of its superiority over the traditional
Engle–Granger method.

2
In such a study, the Johansen and Juselius likelihood ratio test (1980) is used to test for the
variable which contributes most to the cointegration relationship because of the large number of
variables involved. To circumvent this test procedure, we follow Asche and Steen (1998), by
initially running a bivariate cointegration tests. This helps in the exclusion of variables that do
not contribute to the cointegration relationship and hence sets the stage for the Johansen
multivariate tests.

Unit root tests were first performed on the thirteen price series (one for each of the major fish
species in the UK market) Eleven of these variables were found to be non-stationary and these
were divided in three hypothetical markets for ease of analysis. The Whitefish market includes
the main species of cod, haddock, plaice, whiting and saithe; the Shellfish market includes
mussels, shrimps, nephrops, and scallops; and the High-valued Fish market includes salmon and
monkfish.

The next section discusses the methodology adopted in this report, followed by the empirical
results, and conclusions.

Cointegration Theory

It is well documented that time series data are thought to be produced by a stochastic process. A
given time series is said to be stationary if the mean, variance and autocovariances are time
invariant; otherwise they are said to be non-stationary 1. For instance, suppose yt is an observed
stochastic process, then it can be regarded to be weakly stationary if E(yt) = , E(yt - var(yt)
and E[(yt - )(yt-i - )] = cov(yt, yt-i). Sometimes it is necessary to difference a series more than
once to achieve stationarity, although it is argued that this procedure may lead to an important
loss of short-run information. If a series is differenced d times before it becomes stationary, then
it is said to be integrated of the order d, normally denoted I(d), (Engle and Granger 1987). If a
series is found to be stationary, then no differencing is required and the variable is integrated of
order zero, I(0).

Testing for Stationarity

Fundamentally, two principal methods are used to detect nonstationarity: subjective judgement
applied to time series graphs and correlograms, and formal statistical testing. A correlogram is a

1
Nonstationarity of time series data gives rise to several problems such as the possibility of spurious
relationships and inconsistency of parameter estimates. In time series econometric modelling, an
important and basic assumption made is that the variables are stationarity (i.e. the mean and variance are
time-invariant).

3
plot of the autocorrelation function (ACF) of a variable over a given number of lags. Sample
ACFs at lag k ,denoted by  is defined as:


k

   y   y    
t t k
(1)
0  y  
2
t

Where  is the sample mean. As k measures the sample covariance and 0 measures the sample
variance, it can be noted that –1    1. A typical correlogram diagram of a non-stationary
series starts with high spikes closer to one and tapers off gradually as the number of lag increases.
This pattern is an indication that the variable is strongly correlated with its own lags. On the
other hand, if the spikes start close to one and die down quickly to zero or less with the increase
in the number of lags, then the series exhibits little or no autocorrelation, and it is judged likely to
be stationary. It is preferable however to perform formal statistical testing to determine the
integration of time series.

Consider a simple AR(1) data generating process of the following mathematical structure:
y t  y t 1  u t where u t ~ iid (0,  )
2
(2)

The error in such a case could also be referred to as white noise. In equation (2), if , the
random variable yt has a unit root, which is a non-stationary situation. On the other hand, if
<1, the time series is said to be stationary in the levels. Testing for a unit root amounts to
estimating equation (2) and testing the null hypothesis H 0: = 1 against the alternative H a: <
1

Under the null hypothesis, the t statistics do not follow the standard student t distribution, nor are
they asymptotically distributed ~N(0, 1) because stationarity was required in the derivation of the
standard distributions (Johnston and Dinardo, 1997). Dickey and Fuller (1979) derived the
relevant critical values of the test on the basis of Monte-Carlo simulations, consequently the test
for unit roots is referred to as the Dickey-Fuller test.

Autocorrelated errors will invalidate the use of the Dickey-Fuller test distribution, which is based
on the fact that the error term is a white noise. To ameliorate this problem the normal practice is
to include lagged first difference terms so as to ‘whiten’ the noise of the error term2. Thus, (2) can
be reformulated to become:
j
y t  y t 1  y t i   t where  t ~ iid (0,  )
2
(3)
i 1

2
The ADF test is used to do this and involves the rationale of adding lagged differences of dependent
variables to the left hand side of the equation in order to capture autocorrelated omitted variables that
would otherwise enter the error term.

4
Testing for Cointegration
Now let us consider two series yt and xt which are both individually I(d). In general, any linear
combination of the two series will be also be I(d); that is, the residuals obtained from regressing
yt on xt are I(d). If, on the other hand, there exists a vector  , such that the disturbance term
from regressing (ut = yt - xt) is of a lower order of integration, then Engle and Granger (1987)
defined yt and xt as cointegrated of order (d, b), denoted as CI(d, b) with the proviso that d  b 
0.

There are many alternative tests for cointegration, but is well documented that the multivariate
vector autoregression (VAR) approach developed by Johansen (1988) performs better than single
equation (e.g. Engle and Granger) and other multivariate methods (e.g. Stock and Watson
approach) in detecting cointegration.

The Johansen approach starts with defining a column vector X t of n potentially endogenous

variables. It is assumed that X t is an unrestricted VAR involving up to k-lags:

X t  m  A1 X t 1  ......  Ak X t  k  Dt  u t (5)

Where Ai is a n x n matrix of coefficients; m is a constant, Dt are seasonal dummy variables

and u t is assumed to an independent and identically distributed Gaussian process.

Equation (5) can be reformulated into a vector error-correction model by subtracting X t 1 from
both sides of the equation.
X t  m  1 X t 1  .......  k 1 X t  k 1  X t  k  Dt  u t (6)

Note in equation (6) that i  (1  A1 ..... Ai ) , i = 1, 2, …, k, and   (1  A1 ...... Ak ) .

The system of equations specified in (6) contains information both on the short- and the long-run
adjustment to changes in Xt. Thus,  is the long-run impact matrix of Xt. If Xt. is a vector of
non-stationary I(1) variables, then all terms in equation (6) containing Xt-i are I(0) while Xt-k
must also be stationary (i.e. Xt-k ~ I(0)) for ut to be Gaussian, ut ~ I(0).

By induction, one can identify three cases for Xt-k to be I(0):

(a) When all variables in Xt are stationary, implying that there is no problem of
spurious regression.

5
 (b) When there are no linear combination in Xt that are I(0) and thus  is a square
matrix (n x n) of zeros. This in effect means that there is no cointegration.
(c) When there exists up to (n – 1) cointegration relations, in which case Xt-k is
stationary or I(0). In such a case,  is factored as   , where  and  are
(n x r) matrices. Thus,  contains the cointegrating vectors.

Determining how many cointegrating vectors exist in  consequently amounts to testing for
cointegration. This essentially reduces to a consideration of the rank of ; or to finding the
number of linearly independent columns in .

Johansen (1988) obtained estimates of  and  using the method known as reduced rank
regression. The cointegrating vectors in  are the maximum likelihood estimates obtained as
eigen-vectors associated with the largest r; that is, the statistically significant eigen-values which
are obtained from solving the following equation:
S kk  S k 0 S 00
1
S 0k  0 (7)

Regressing X t
on its lagged differences (i.e. X t 1 , X t  2 ,....X t  k 1 ) and

X t  k on X t  k 1 , gives two separate residual moment matrices, denoted by S 00 and S kk

respectively in equation (7). S 0 k is the cross-moment matrix.

The solution to equation (7) gives eigen-values that allows for the formation of a likelihood ratio
test to determine the rank of  . In other words, the eigen-values are also the measure of the
strength of the cointegration relations.

Johansen proposed two statistics for testing for the cointegration rank; the trace and the maximal
statistics. The null hypothesis for both statistics is that there is at most r (<n) cointegrating
vectors. The alternative hypothesis for the trace is that there are more than r cointegrating
vectors, while for the maximal is that there is one additional cointegrating vector which exists
(r+1). These restrictions can be imposed for different values of r and then the log of the
maximized likelihood function for the restricted model is compared with the maximized
likelihood function of the unrestricted model and a standard ratio computed for both statistics as
follows:

trace   log(1   i ) r  0,1........n  2, n  1 (8)


 max   log(1  r 1 ) r  0,1........n  2, n  1 (9)

6
Distributions of the test statistics are non-standard and approximate asymptotic critical values
have to be obtained.

It is well known in the literature that the convergence toward long-run equilibrium could be due
to a strong relation among some of the variables and not all of them. The determination of which
of the variables should be excluded in such a situation is therefore important. Asche and Steen
(1998) have argued that price series which are subject to independent data generation processes
could be weakly cointegrated not as result of arbitrage and substitution that are key to market
delineation, but due to problems such as demand shocks and significant common costs. The so-
called exclusion test is perhaps the best way forward at this juncture. Johansen and Juselius
(1990) show that the likelihood ratio test of excluding variables, or restricting the variables to
zero, is based on the estimated eigen-values of the unrestricted and restricted cointegration space
according to the following equation:
r

 2 ln  Q   i 1 ln 1  *i 1  i 
1
 (10)

where r is the number of cointegrating vectors, i is the eigenvalue of the ith vector from the
*

restricted space and i is the eigenvalue from the ith vector from the unrestricted cointegrating

space. Johansen and Juselius proved that equation (10) is distributed as  2 with r(p-s) degrees
of freedom, where r is the number of cointegrating vectors, p is the dimension of the unrestricted
cointegrating space and s is the dimension of the restricted space.

Other forms for testing of the robustness of cointegration relationship are due to Asche, Bremnes
and Wessells (1997)3. The reasoning behind their test procedure is that the assumption of price
parity holds only when n goods in a system have (n – 1) cointegrating vectors; implying that all n
goods in the system are pairwise cointegrated. In this report we follow Steen and Asche (1998)
by first running bivariate tests for cointegration, followed by multivariate tests. The bivariate
results and the strength of the eigen-values will give an indication for species that should be
included in the multivariate system.

Empirical Results

Thirteen fish species were examined for market integration for the United Kingdom. These
species are listed in Table 1. Detailed information on the market characteristics and the products
can be found in the descriptive market report 4. Quarterly data from 1982 through 1996 are used
3
As referenced in Asche and Steen (1998).
4
Review of the United Kingdom Seafood Market (1980-96). “Implications for Fisheries Management
Systems of Demand Interactions Between Farmed and Wild Caught Species in the European Markets”.

7
for all species in this study except for salmon, whose price series starts in 1985. Prices are
obtained from the official landings data (SOAEFD, MAFF) and represent quayside values.
Following Asche and Steen (1998), nominal prices are used.

Table 1 Species analysed in the U.K. market

1 Cod Co
2 Haddock Ha
3 Whiting Wh
4 Plaice Pl
5 Saithe Sa
6 Herring He
7 Mackerel Ma
8 Shrimps Sh
9 Nephrops Ne
10 Scallops Sc
11 Mussels Mu
12 Monkfish Mo
13 Salmon Sal

SAC Report No. 1.3 EU Funded Research Project FAIR-CT96-1814. A. Sheal, P.L. Clay and S. Pascoe.
April 1998.

8
Unit Root Test Results
Augmented Dickey-Fuller (ADF) tests are used to determine the presence of a unit root. In
addition, inspections of the time series graphs and the correlograms of the price series are
performed. These will give a preliminary indication of the behaviour of the data and will
compliment the formal ADF statistical tests for unit roots.

Time series graphs and correlograms for each of the 13 species under examination are presented
in Appendices I. In general, the trends which appear in the graphs for all but two of the species
are typical of non-stationary series. This is apparent in that the mean price appears to be non-
stationary over time when examined in levels, although it appears to be invariant to time when
examined in first-differences. The two exceptions to this pattern are for the mackerel and herring
price series, which appear to be stationary in levels. The correlograms for all of the variables
which appear to have a non-stationary process do not die out gradually with increases in the
number of lags; a pattern consistent with the presence of a unit root.

Two separate ADF equations are used to test for unit roots. The first equation includes a
constant, while the other contains both a constant and a trend term. The first stage in testing for a
unit root using the ADF approach involves testing the hypothesis that a unit root is present, or H 0:
I(1) against the alternative hypothesis H A: I(0). If we can reject the null hypothesis, we can
conclude that the price series is stationary. However, failure to reject the null hypothesis leads to
the second stage of the testing procedure where H 0: I(2) is tested against H A: I(1). This test is
performed on the first differences of the data. At this stage, rejection of the null indicates that the
price series is integrated of order 1, and is therefore non-stationary. The ADF test results for the
price series in levels are presented in Table 2, with the results for the ADF tests of the differenced
data are presented in Table 3.

9
Table 2 Augmented Dickey-Fuller Test Results on Levels of Price Series
Species ADF Significant ADF Significant
(No Trend) lag (Trend) lag
Cod -2.66 1 -2.38 1
Haddock -2.15 4 -0.94 3
Whiting -2.51 3 -1.45 3
Plaice -0.86 3 -3.63* 5
Saithe -2.29 1 -2.68 2
Herring -3.27* 3 -3.34 3
Mackerel -2.00 3 -4.12* 4
Shrimps -2.62 2 -2.54 5
Nephrops -1.68 4 -3.22 4
Scallops -1.77 2 -2.95 2
Mussels -2.16 1 -5.09** 2
Monkfish -1.37 4 -1.11 4
Salmon -0.91 3 -1.50 3
**Indicates significant at 1%, *Indicates significant at 5%.
Tests without trend critical values are 5%=-2.916, 1%=-3.555
Test with trend critical values are 5%=-3.494, 1%=-4.135

Table 3 Augmented Dickey-Fuller Test Results on First Differences of Price

Series
Species ADF Significant ADF Significant
(No Trend) lag (Trend) lag
Cod -9.45** 1 -9.87** 1
Haddock -3.08* 3 -6.80** 2
Whiting -10.96** 2 -11.51** 2
Plaice -7.98** 2 -7.89** 2
Saithe -9.83** 1 -9.83** 1
Shrimps -8.04** 1 -7.99** 1
Nephrops -3.18* 3 -3.78* 5
Scallops -10.88** 1 -10.88** 1
Mussels -7.74** 2 -7.67** 2
Monkfish -3.38* 3 -3.34 5
Salmon -8.77** 1 -8.67** 1
**Indicates significant at 1%, *Indicates significant at 5%
Test without trend critical values are 5%=-2.916, 1%=-3.555
Test with trend critical values are 5%=-3.494, 1%=-4.135

10
From these results, we cannot reject the null hypotheses for nine of the prices series (cod,
haddock, whiting, saithe, shrimp, nephrops, scallops, salmon and monkfish). The ADF test
rejects the null hypothesis of non-stationarity for herring 5, mackerel, plaice and mussels 6, leading
to the conclusion that these series are stationary in their levels.

Examining the correlograms of these four price series, this conclusion is supported in the case of
mackerel and herring, but not for mussels or plaice. In the case of herring and mackerel, the
spikes of the correlograms die out quickly as the number of lags increases. Based on this
evidence, we conclude that herring and mackerel prices are stationary and do not include them in
the next stage of testing. For the price series of mussels and plaice, the correlograms indicate that
a unit root may be present, as the spikes on the correlogram decline only gradually as the number
of lags increases. As the results of the ADF test are inconsistent with the graphical analysis,
further tests will be performed on these variables.

The ADF tests performed on the differenced data allow us to reject the null hypothesis in all
cases, with the exception of the monkfish price series when a trend is included. We are not able
to reject the null in this case at 5%, however we can at 10%, and we therefore conclude that all of
the price series7 are I(1) processes. Due to the uncertainties associated with the variables of
mussels and plaice however, the results of the cointegration tests for these variables will be
treated with some caution.

Cointegration Test Results

The Data Series

To proceed with the analysis, we will divide the market into three hypothetical market segments.
This is primarily to ease the analysis and identification of the relationships amongst the fish
species in the market. The Whitefish market includes cod, haddock, whiting, plaice and saithe.
These species are very similar in use and in appearance, and are therefore likely to compete
within a single market. Examining the graphs of their price movements over time (Figures 1a &
1b), further support is provided for grouping these species as their prices appear to move
together, and are at a similar level. The second grouping is the Shellfish market which includes
shrimp, nephrops, scallops and mussels. These species are grouped together based on their
similarities in price (Figure 2) and in form, as they are all shellfish and therefore can be assumed
to operate in the same market. Finally, there is a High-valued Fish market, which includes
monkfish and salmon. Figure 3 shows the trends in prices for these two products.
5
Without a trend.
6
With a trend included.
7
With the exception of herring and mackerel, which were concluded to be I(0).

11
Figure 1a Price Trends in the Whitefish Market – Cod & Haddock

1.60

1.40

1.20

1.00
£/kg

0.80

0.60

0.40

0.20

0.00
I II III IV I II III IV I II III IV
1982 1987 1992

Cod Haddock

Figure 1b Price Trends in the Whitefish Market – Whiting Plaice & Saithe

1.60

1.40

1.20

1.00
£/kg

0.80

0.60

0.40

0.20

0.00
I II III IV I II III IV I II III IV
1982 1987 1992

Whiting Plaice S aithe

12
Figure 2 Price Trends in the Shellfish Market

3.50 0.70

3.00 0.60

2.50 0.50

£/kg - mussels
2.00 0.40
£/kg

1.50 0.30

1.00 0.20

0.50 0.10

0.00 0.00
I III I III I III I III I III
1982 1985 1988 1991 1994

Nep S callops S hrimps Mussels

Figure 3 Price Trends in the High-valued Fish Market

6.00
5.00
4.00
£/kg

3.00
2.00
1.00
0.00
I II III IV I II III IV I II
1985 1990 1995

Monk S almon

Looking at the Whitefish market, the price series for cod and haddock move together very closely
over the time frame covered, as do the series for whiting and saithe. Plaice follows the trends for
most of the earlier years, although it does appear to continue its upward trend after 1989, while
the other four products tend to follow a downward trend. Cointegration tests will show whether
the departure of the series for plaice from the common trend of the other series is a temporal
shock to the system, or if this series does in fact have a long-run relationship with the other

13
species. All series in this market segment display a marked seasonality, with prices peaking in
quarter IV. This may be as a result of increased demand in the festive seasons of the year, or the
decline in landings over the winter months.

Price movements in the Shellfish market mirrors the pattern witnessed in the Whitefish market.
The difference is that the shellfish prices continue along an upward trend into the 1990s, which
the majority of the whitefish prices did not. Of note in this market is the significant price
differential between mussels and the other three species. This deviation appears to primarily in
the levels of the prices, although it will be noted as it may affect the long run relationship
between the four species.

Figure 3 graphs the price movements of the High-valued Fish market. The price series for
salmon shows a decreasing trend while the price of monkfish is showing an increasing one. This
at first may negate the assumption that these two fish operate in the same market segment,
however although there are substantial price differentials in the earlier years, the prices appear to
be converging in later years. The tests and analysis in the following section will discern whether
these two series have a long-run relationship, as evidenced in the graph.

Johansen Bivariate Tests

The Johansen procedure of testing for cointegration has been used in this study. This procedure
provides a method for establishing the number of cointegrating vectors within a vector
autoregressive system (VAR), and offers advantages over the traditional Engle-Granger approach.
The Johansen test procedure does not require the specification of a dependent variable prior to
testing, and has higher power than the Engle-Granger tests. The Johansen test not only allows for
the determination of cointegration between variables, but also shows the ‘strength’ of the
relationship.

Two test statistics are available in the Johansen method to determine the number of cointegrating
vectors; the maximum and the trace eigen-value. While there are differences in the reliability of
the two tests, both results are presented in this paper. The differences do not create a major
problem here as the same conclusions are reached concerning cointegration in all but 6 of the 55
bivariate situations tested. In those cases where the trace test indicates cointegration (reject H 0:
p=0 in favour of HA: p=1, where p = the number of cointegrating vectors), but the maximum
eigen-value test rejects it, we base our conclusion on the maximum test and reject the presence of
cointegration8.
8
Results are presented at both 1% and 5% significance, however the decision to reject the null hypothesis
will be evaluated at 5%.

14
Bivariate tests for cointegration were first performed on all possible combinations of the variables
within the three aforementioned hypothetical markets (Whitefish, Shellfish, High-valued Fish).
These bivariate tests will help to give us an indication of the grouping to use in the multivariate
Johansen tests.

Table 4 gives the cointegration results for the bivariate tests for the five species included in the
Whitefish market9. Both sets of results are given in the table; the first value is the maximum
eigen-value test statistic and the second relates to the trace test statistic. All six species in this
category appear to be pairwise cointegrated to one another (at 5% significance), with the
surprising exception of cod and haddock. While we can reject the null hypothesis using the trace
test, the maximum test does not allow us to reject the null that p=0 at 5% although it does at
10%. This type of controversy is not uncommon in cointegration analysis. According to
Johansen and Juselius (1990), the maximum eigen-value test is considered to be more reliable
than the trace test, since the trace test tends to accept cointegration too often. However Cheung
and Lai (1993) suggest that the trace test shows more robustness to both skewness and excess
kurtosis in residuals than the maximal eigenvalue test 10. We can cautiously interpret from these
results that cod and haddock are cointegrated, albeit weakly.

9
Critical values for the maximum test (p=0) are 20.20 at 1%, 15.70 at 5% and 13.75 at 10%
Critical values for the trace test (p=0) are 24.60 at 1%, 20.00 at 5% and 17.85 at 10%
10
Cod and haddock are both negatively skewed and suffer from excess kurtosis.

15
Table 4. Johansen Bivariate Cointegration Tests: Whitefish Market
Species 1 Species 2 Maximum test Trace test
p=0 p0
Cod Haddock 15.12‡ 27.99**
Cod Whiting 33.41** 39.29**
Cod Plaice 36.99** 41.08**
Cod Saithe 36.38** 53.97**
Haddock Whiting 27.42** 31.99**
Haddock Plaice 18.92* 22.55*
Haddock Saithe 18.66* 27.31**
Whiting Plaice 19.00* 23.48*
Whiting Saithe 29.35** 34.78**
Plaice Saithe 15.71* 23.96**
**Indicates significant at 1%, *indicates significant at 5%, ‡ indicates significant at 10%

The Shellfish market does not exhibit the same amount of integration as witnessed in the
Whitefish segment. As can be seen from Table 5, shrimp is pairwise cointegrated with scallop
and nephrops although no other long-run relationships were found among the four species. From
these results, it appears that shrimp forms a long-run relationship with nephrops and scallops
individually, but there is not a clearly defined market segment for shellfish. In the earlier unit
root tests, we were unable to determine if the price series for mussels was stationary due to the
inconsistent results. From the evidence provided from the cointegration tests however, there does
not appear to be a problem. The inclusion of a stationary series would bias the cointegration tests
towards concluding cointegration too often, a situation which did not occur with the mussel price
series in any of the pairwise tests.

Table 5. Johansen Bivariate Cointegration Tests: Shellfish Market

Species 1 Species 2 Maximum test Trace test
p=0 p0
Shrimp Nephrops 18.78* 21.93*
Shrimp Scallops 17.16* 20.26*
Shrimp Mussels 15.66‡ 18.49‡
Nephrops Scallops 10.27 11.70
Nephrops Mussels 8.08 9.47
Scallops Mussels 12.44 13.96
**Indicates significant at 1%, *indicates significant at 5%, ‡ indicates significant at 10%

Table 6 shows the results for the High-valued Fish market, which indicates that the two products,
monkfish and salmon, are pairwise cointegrated at 5% significance.

Table 6. Johansen Bivariate Cointegration Tests: High-valued Fish Market

Species 1 Species 2 Maximum test Trace test
p=0 p0
Monkfish Salmon 20.04* 22.95*

16
**Indicates significant at 1%, *indicates significant at 5%, ‡ indicates significant at 10%

Having established the where there are long-run relationships within our market segments, it is
now interesting to establish whether there are any relationships between the hypothetical market
segments. To do this, we again perform bivariate tests for cointegration, this time grouping two
market segments together at a time.

The first grouping we examine (Table 7) is the Whitefish and the Shellfish markets. Interspecies
dependency is significantly high, indicating that there is a market segment in which wildfish and
shellfish compete. At a 5% level of significance, 70% of all the possible combinations of
Whitefish and Shellfish are pairwise cointegrated (this increases to 80% at a 10% level of
significance). It is interesting to note that all of the whitefish species form a long-run relationship
with shrimp, probably indicating that shrimp operates in the Whitefish market segment in the UK.
This is not too surprising as shrimps are a mainstay product in supermarkets, commonly used for
appetisers and within meals. In addition, the prices of shrimps are relatively low when compared
with the other shellfish species included in our hypothetical market segment. In fact, the prices
of shrimp are more in line with the whitefish species in level, although they exhibit more
fluctuations (Figure 4).

Mussels also appear to be a main component of the market segment including whitefish, as this
species cointegrates with all of the whitefish species on a pairwise basis, with the exception of
haddock. On the basis of the maximal test, it can be seen that nephrops and haddock show the
weakest integration with the other species in the market as there are only 2 long-run relationships
defined out of a possible 5. Nephrops are integrated with whiting and saithe, but not with cod,
plaice and haddock, while haddock does not form long-run relationship with scallops, nephrops
and mussels.

17
Table 7 Johansen Bivariate Cointegration Tests: Whitefish / Shellfish Markets
Species 1 Species 2 Maximal test Trace test
p=0 p0
Cod Shrimp 23.27** 40.52**
Cod Nephrops 15.24‡ 22.77*
Cod Scallops 17.14* 20.49*
Cod Mussels 21.14** 24.41**
Haddock Shrimp 22.42** 29.52**
Haddock Nephrops 7.17 10.08
Haddock Scallops 7.40 11.60
Haddock Mussels 10.34 11.93
Whiting Shrimp 34.10** 43.89**
Whiting Nephrops 18.17* 22.13*
Whiting Scallops 14.70‡ 17.77‡
Whiting Mussels 15.71* 19.10‡
Plaice Shrimp 28.24** 38.92**
Plaice Nephrops 10.16 19.39‡
Plaice Scallops 15.93* 21.77*
Plaice Mussels 24.44** 31.66**
Saithe Shrimp 28.95** 38.52**
Saithe Nephrops 20.05* 24.27*
Saithe Scallops 16.07* 19.28‡
Saithe Mussels 16.42* 20.95*
**Indicates significant at 1%, *indicates significant at 5%, ‡ indicates significant at 10%

18
Figure 4 Price Trends of Shrimp and the Whitefish market

3.25
3.00
2.75
2.50
2.25
2.00
1.75
£/kg

1.50
1.25
1.00
0.75
0.50
0.25
0.00
I III I III I III I III I III
1982 1985 1988 1991 1994

Cod Haddock Saithe

Whiting Plaice Shrimps

Table 8 Johansen Bivariate Cointegration Tests: Whitefish and High-valued Fish Markets
Species 1 Species 2 Maximal test Trace test
p=0 p0
Cod Monkfish 28.80** 42.33**
Cod Salmon 26.30** 29.13**
Haddock Monkfish 8.50 15.39
Haddock Salmon 6.58 7.65
Whiting Monkfish 21.74** 25.18**
Whiting Salmon 17.74* 23.00*
Plaice Monkfish 19.09* 21.74*
Plaice Salmon 18.87* 23.39*
Saithe Monkfish 35.53** 44.84**
Saithe Salmon 28.42** 31.40**
**Indicates significant at 1%, *indicates significant at 5%, ‡ indicates significant at 10%

19
The next investigation into market integration is between the Whitefish and High-valued Fish
markets. The bivariate cointegration test results these two markets are presented in Table 8. The
data supports 80% of all combinations to be pairwise cointegrated in this market segment. The
exception in this case is haddock, which does not appear to cointegrate with either salmon or
monk.

The next hypothetical market relationships examined are for Shellfish and High-valued Fish.
This market can be thought of as the high value segment of the market, comprising salmon,
monkfish, mussels, nephrops, shrimp and scallops. Based on maximal test, salmon appears to
share a long-run relationship with mussels, nephrops and shrimp at 5% level of significance,
while monkfish are found to cointegrated only with shrimp. Using the trace test, salmon is found
to be cointegrated only with shrimps, which is consistent with research done by Asche, Salvanes
and Steen (1997) on the EU market. From these results, it seems unlikely that a fully integrated
market involving these species will be found from the multivariate tests.

Table 9 Johansen Bivariate Cointegration Tests: Shellfish and High-valued Fish Markets
Species 1 Species 2 Maximal test Trace test
p=0 p0
Shrimps Monkfish 21.03* 28.93**
Shrimps Salmon 15.87* 20.29*
Nephrops Monkfish 9.68 17.28
Nephrops Salmon 15.82* 19.45‡
Scallops Monkfish 7.17 11.27
Scallops Salmon 13.21 14.97
Mussels Monkfish 8.50 14.32
Mussels Salmon 17.78* 19.08‡
**Indicates significant at 1%, *indicates significant at 5%, ‡ indicates significant at 10%

Multivariate Johansen Test Results

Since the bivariate tests suggest that elements of the Whitefish market are pairwise cointegrated in
one way or the other, we would expect them to form a fully integrated system, with n-1
cointegrating vectors. Theoretically, variables could cointegrate even though one or more of
them do not significantly contribute to the longrun relationship. Asche and Steen (1998) termed
these variables as the ‘main contributors’ to the significant cointegration relationships. Insofar as
we know that substitution and arbitrage are key to market delineation, they are not the only
factors in the market that may cause prices to cointegrate. Factors such as exogenous demand
shocks, price stickiness and substantial common cost components may also lead prices of
different species to appear to be cointegrated. This then raises the question of whether all the
variables in each of our pre-selected market segments will significantly contribute to the

20
cointegration relationship. Asche and Steen (1998) put forward exclusion tests as a possible
solution for this problem. The bivariate tests in the proceeding section not only provide
information on which of the price series are cointegrated in a pairwise manner, but they also
gives clues to which of the series are strongly bonded as indicated by the eigen-values.
Following Steen and Asche (1998), and on the basis of the bivariate test results, we can specify a
Whitefish segment containing cod, haddock, whiting, plaice and saithe. We will also maintain
our Shellfish market of shrimp, nephrops, scallops and mussels and conduct the multivariate tests
on these segments, keeping in mind the weaker relationships found within the Shellfish segment.

The test results for the Whitefish market are presented in Tables 10 and 11. Initially, all five
species within this market segment were included in the multivariate system. On the basis of
both the maximal and the trace test, the null hypothesis of p  1 can be rejected in favour of p  2
for this market, allowing us to conclude that only 2 cointegrating vectors exist. Combinations of
these five species were then examined in an attempt to find a fully integrated system with (n-1)
cointegrating vectors. This situation is found with the four species of cod, haddock, plaice and
saithe, as can be seen from the test results shown in Table 11.

For this reduced whitefish market, the null hypothesis of p  1 can be rejected in favor of p  2
when using the trace test at 5% level of significance. However, when examining the results using
the maximal test, the null hypothesis of p  2 can be rejected in favor of p  3. These results
suggest that the trace test supports, at most, two cointegrating vectors while the maximal test
finds at least three cointegrating vectors in the system. Following Johansen and Juselius (1990),
we use the maximal test to interpret the results and can therefore conclude that the system
contains at least three cointegrating vectors. Going by this, any shock in this system will quickly
dissipate and equilibrium relationships will be restored. This supports the widely held belief that
a whitefish market segment exists in the UK.

21
Table 10 Whitefish market (A) - cod, haddock, whiting, plaice and saithe
Ho: rank = p Maximal test Critical value Trace Test Critical value
(95%) (95%)
p=0 46.58** 34.40 101.70** 76.10
p1 32.65* 28.10 55.12** 53.10
p2 13.43 22.00 22.47 34.90
p3 5.07 15.70 9.04 20.00
p4 4.00 9.20 4.00 9.20
** Indicates significant at 1%, * indicates significant at 5%

Table 11 Whitefish market (B) - cod, haddock, plaice and saithe

Ho: rank = p Maximal test Critical value Trace Test Critical value
(95%) (95%)
p=0 36.89** 28.10 79.69** 53.10
p1 24.17* 22.00 42.79** 34.90
p2 16.42* 15.70 18.62 20.00
p3 2.20 9.20 2.20 9.20
** Indicates significant at 1%, * indicates significant at 5%

The results of the multivariate tests for the Shellfish market are disappointing although not
surprising given that the bivariate test results indicated weak integration among these species.
Mussels were not included in the system for the multivariate tests, as they were not found to
integrate on a pairwise basis with any of the other three shellfish species (at 5% significance).
While the remaining species of shrimp, nephrops and scallops were found to be pairwise
cointegrated, no cointegrating vectors could be found in this system (Table 12) regardless of
which test procedure was used.

Table 12 Shellfish market – shrimp, nephrops and scallops

Ho: rank = p Maximal test Critical value Trace Test Critical value
(95%) (95%)
p=0 18.93 22.00 31.23 34.90
p1 10.31 15.70 12.30 20.00
p2 1.99 9.20 1.99 9.20
** Indicates significant at 1%, * indicates significant at 5%

From the results to date, it has been established that the data lend support for an integrated market
for whitefish, but not for shellfish. However, the bivariate cointegration results suggested that
there were long-run relationships between some of the shellfish species and the whitefish market.
The strongest of these relationships appeared to be with shrimp, which was pairwise cointegrated
with all of the species in the whitefish market. To determine if this species does belong to the
whitefish market, we extend this segment by adding in shrimp and testing the system again for

22
cointegration. Theoretically, we would expect that adding in this species would increase the
number of cointegrating vectors (p) by one, or at least not reduce p.

The results of the multivariate cointegration tests including shrimp in the whitefish system are
presented in Table 13. Surprisingly, the addition of the shrimp variable reduces the number of
cointegrating vectors that can be found to 1. This results seems to contradict what would be
expected on the basis of the relationships found in the bivariate tests. A possible explanation for
the result may be that there is a problem of dimensionality (too many variables in the system and
too few observations).

Table 13 Whitefish market + Shrimp

Ho: rank = p Maximal test Critical value Trace Test Critical value
(95%) (95%)
p=0 61.63** 34.40 120.7** 76.10
p1 26.07 28.10 59.07* 53.10
p2 18.39 22.00 33.00 34.90
p3 12.53 15.70 14.61 20.00
p4 2.07 9.20 2.08 9.20
** Indicates significant at 1%, * indicates significant at 5%

To further examine the possible linkages across market segments, multivariate tests were
performed on the Whitefish market with various other species, both from the Shellfish segment
and the High-valued Fish segment. The criteria for testing the inclusion of additional species into
the fully identified system of cod, haddock, plaice and saithe was that the new species was
pairwise cointegrated with at least 3 of the 4 whitefish species. The test results for these systems
are presented in Tables 14 – 18.

23
Table 14 Whitefish market +Scallops
Ho: rank = p Maximal test Critical value Trace Test Critical value
(95%) (95%)
p=0 42.41** 34.40 89.97** 76.10
p1 24.85 28.10 47.56 53.10
p2 16.29 22.00 22.71 34.90
p3 4.28 15.70 6.42 20.00
p4 2.14 9.20 2.14 9.20
** Indicates significant at 1%, * indicates significant at 5%

Table 15 Whitefish market + Mussels

Ho: rank = p Maximal test Critical value Trace Test Critical value
(95%) (95%)
p=0 48.41** 34.40 106.2** 76.10
p1 23.04 28.10 57.77* 53.10
p2 17.74 22.00 34.72 34.90
p3 13.67 15.70 16.98 20.00
p4 3.31 9.20 3.31 9.20
** Indicates significant at 1%, * indicates significant at 5%

Table 16 Whitefish market +Monkfish

Ho: rank = p Maximal test Critical value Trace Test Critical value
(95%) (95%)
p=0 33.89 34.40 100.40** 76.10
p1 33.34** 28.10 68.46** 53.10
p2 19.71 22.00 35.12* 34.90
p3 13.10 15.70 15.40 20.00
p4 2.30 9.20 2.30 9.20
** Indicates significant at 1%, * indicates significant at 5%

24
Table 17 Whitefish market +Salmon
Ho: rank = p Maximal test Critical value Trace Test Critical value
(95%) (95%)
p=0 55.22** 34.40 116.30** 76.10
p1 30.51* 28.10 61.03* 53.10
p2 19.07 22.00 30.52 34.90
p3 8.51 15.70 11.45 20.00
p4 2.94 9.20 2.94 9.20
** Indicates significant at 1%, * indicates significant at 5%

Table 18 High-valued Fish market + shrimp

Ho: rank = p Maximal test Critical value Trace Test Critical value
(95%) (95%)
p=0 21.75 22.00 38.65** 34.90
p1 14.16 15.70 16.90 20.00
p2 2.74 9.20 2.74 9.20
** Indicates significant at 1%, * indicates significant at 5%

From the tables we can see that the extension of the number of species in the Whitefish market
fails to increase the number of cointegration vectors in all cases where the bivariate results
indicated a possible linkage. These tests reveal that none of the elements from the shellfish or the
high-valued segments significantly contribute to the relationships established within the whitefish
segment. It follows that these species do not compete within the same segment of the UK fish
market.

In addition, elements of the shellfish category do not appear to compete with the high-valued fish
species of salmon and monkfish, although there were some bivariate relationships established
between shrimp and both of these species. These findings are consistent with the finding of
Asche and Steen (1998), and Gordon, Salvanes and Atkins (1993).

Conclusion

On the basis of both the bivariate and the multivariate cointegration tests, the data for the UK
seafood markets support the notion of a distinct Whitefish market made up of cod, haddock,
plaice and saithe. However the results for all other hypothesised relationships were mixed. We
could find support for a shellfish market in a bivariate context, with shrimp, scallops and
nephrops all inter-related. Long-run relationships however could not be found when the
cointegration tests were carried out in a multivariate context. Similarly, a long-run relationship

25
was found to exist between salmon and monkfish, although no long-run relationships could be
found between these two species and the Whitefish system or with the shellfish species.

In general, it appears that the UK market for Whitefish is well-defined internally. There appear to
be some linkages, or long-run relationships, with species outside of this system on the basis of
bivariate test results, although not for all of the species (Figure 5). With the exception of
haddock, all of the species in the whitefish segment are pairwise integrated with the four types of
shellfish and the two high-valued species. Haddock forms long-run relationships with shrimp,
salmon and monkfish, as well as being part of the Whitefish system. Mussels are the other
species which appear to operate on the margins of the fish market, showing long-run relationships
with the Whitefish segment, but not other shellfish or monkfish.

Figure 5 Market Relationships for fish in the UK

While the results of the

Scallops & market delineation work are, on the surface, not definitive in terms of
Haddock
Nephrops
defining distinct market segments within the UK fish market, some indications
Cod of the linkages
within this large and diverse market can be made. Further analysis ofWhiting
the markets, and the
relationships within and between them, will be performed using demand models.
Plaice These models
should help toShrimp
further identify and define how&the
Salmon fish markets within the UK
Monkfish operate.
Saithe

Mussels

26
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Granger C.W.J., 1986. "Development and the study of Cointegrated Economic Variables",
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Johnston, J. and J. Dinardo, 1997. "Econometric Methods", 4th Edition, McGraw-Hill
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Stigler, G.J. and R.A. Sherwin, 1985, "The Extent of Market" Journal of Law and Economics,
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28
 Appendix I
Time Series Graphs and Correlograms for Data in Levels

29