Original Article

The Asymmetric Effects of Crude Oil Global Business Review

Prices and Exchange Rates on Diesel
Prices for 27 European Countries
1­–25
© 2021 IMI
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DOI: 10.1177/0972150921999035
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Ebru Yuksel Haliloglu1 and M. Hakan Berument2

Abstract
Many studies have examined the asymmetric effect of US dollar-denominated crude oil prices on
petroleum product prices. The ‘rockets and feathers’ argument suggests that a crude price increase raises
petroleum product prices more than a corresponding decrease in crude prices lowers product prices.
However, for the countries that do not use the US dollar as a medium of exchange, petroleum product
prices are also affected by the exchange rates. This paper analysed the asymmetric effects of both US
dollar-denominated crude oil prices and exchange rates on local currency-denominated diesel prices for
27 European countries in the short run as well as long run. The overall empirical evidence suggests that,
in the short run, diesel prices react more to crude oil price increases than to a decrease, parallel to the
‘rockets and feathers’ argument. However, contrary to that argument, the long-run adjustment is the
opposite. As for exchange rate shocks, again the ‘rockets and feathers’ argument holds and diesel prices
respond more to exchange rate depreciation than appreciation in the short and long run.

Keywords
Rockets and feathers, asymmetric effect, crude oil price, diesel price, exchange rate

Introduction
Petroleum product prices are important because of their effects on economic performance (Kushwah &
Siddiqui, 2020; Rao & Goyal, 2018). Therefore, the effects of petroleum product prices on economic
performance have been investigated in various studies in the literature. Apart from several determinants
such as transportation cost, rental cost and labour cost, petroleum product prices are mostly influenced by
crude oil prices and exchange rates. Most of the earlier studies were associated with the ‘rockets and
feathers’ hypothesis introduced by Bacon (1991), which posits that petroleum product prices react faster to
rises in crude oil prices than to decreases in prices. Besides crude oil prices, another factor is the exchange
rate pass-through to petroleum product prices that builds up price asymmetry due to exchange rate changes.

1 Department of Industrial Engineering, Gazi University, Ankara, Turkey.

2 Department of Economics, Bilkent University, and the Center for Middle Eastern Studies, Ankara, Turkey.

Corresponding author:
M. Hakan Berument, Department of Economics, Bilkent University, and the Center for Middle Eastern Studies, Ankara, Turkey.
E-mail: berument@bilkent.edu.tr
2 Global Business Review

Particularly, the recent volatility in crude oil prices attracts attention to the price asymmetry commonly
seen in retail petroleum product markets. This study aimed to explore the asymmetric effects of crude oil
prices and exchange rates on diesel prices for 27 European countries over the short and long run.
The ‘rockets and feathers’ hypothesis asserts that gasoline prices give a faster response to increases in
crude oil prices than to decreases. It is suggested that companies, owing to their market power, are
inclined to raise prices rapidly when faced with cost increases while behaving sluggishly to adjust their
prices downwards in response to cost decreases to keep profit levels high. Some other possible
explanations for the presence of price asymmetry include inventory adjustment costs, the level of
competition at different stages of the distribution channel, consumer search costs, type of cost shock
(permanent vs. transitory cost shock and long-term vs. short-term cost shock) and consumer response to
changing prices (Balke et al., 1998; Berument et al., 2014; Borenstein et al., 1997; Brown & Yücel,
2000; Perdiguero-García, 2013). The existing empirical literature on asymmetric price adjustment
between crude oil and gasoline prices differs by country, data set, frequency of data, the econometric
model used and findings. Although the ‘rockets and feathers’ phenomenon is supported in several studies,
there are also some mixed results in the literature. For instance, while Bacon (1991) found evidence for
strong and rapid adjustment of UK gasoline prices to cost changes, Manning (1991) showed that price
adjustment does not last long. Likewise, various results are observed in the literature, some of which
confirm price asymmetry and some which conclude no asymmetry or mixed signs of asymmetry.
Several studies have referred to as proponents of price asymmetry. They include studies by Borenstein
et al. (1997), Balke et al. (1998), Chen et al. (2005), Radchenko (2005), Al-Gudhea et al. (2007),
Radchenko and Shapiro (2011), Pal and Mitra (2015), Polemis and Tsionas (2016, 2017) and Qin et al.
(2016) for the US; Reilly and Witt (1998), Greenwood-Nimmo and Shin (2013) for the UK; Galeotti et
al. (2003) and Polemis and Fotis (2014, 2015) for few European Union countries and the USA; and Pal
and Mitra (2016) for India. A detailed meta-analysis done by Perdiguero-Garcia (2013) provides some
evidence as to how common price asymmetry affects gasoline markets.
In contrast, various studies could not find asymmetry or report contradictory results with respect to the
size and sign of price asymmetries in gasoline markets. Some of these studies include Kirchgassner and
Kubler (1992) and Assane-Otoo and Schneider (2015) for Germany; Contín-Pilart et al. (2009) for Spain;
Asplund et al. (2000) for Sweden; Godby et al. (2000) for Canada; Bachmeier and Griffin (2003), Honarvar
(2009), Atil et al. (2014) and Bremmer and Kesselring (2016) for the USA; Grasso and Manera (2007),
Meyler (2009), Clerides (2010) and Karagiannis et al. (2015) for some European countries; Bermingham and
O’Brien (2011) for Ireland and the UK; Kristoufek and Lunackova (2015) and Apergis and Vouzavalis (2018)
for some European countries and the USA. The existence of conflicting results shows that a consensus could
not be attained concerning the rationale, size and sign of price asymmetries in the petroleum product markets.
Recently, the literature on price asymmetry in gasoline markets has drawn attention to the role of
exchange rates in the price transmission mechanism due to high dependency on oil imports, particularly
by European countries. For example, Ogbuabor et al. (2018) argued that exchange rate is a component of
the cost of oil imports especially for oil-importing European countries, so not accounting for the effect
of exchange rates in the analysis of retail energy price fluctuations might be deceptive. Moreover, Chen
et al. (2018) stated that for the 27 European Union countries, the asymmetric behaviour of gasoline prices
was mainly driven by the effects of exchange rate pass-through. According to statistics of the International
Energy Agency, many European countries (e.g., Austria, Belgium, Czech Republic, Finland, France,
Germany, Greece, Ireland, Italy, the Netherlands, Poland, Portugal, Slovakia, Spain, Sweden and Turkey)
have an increasing oil import dependency ratio varying between 90% and 100% (International Energy
Agency, 2014). Countries having high oil import dependency become more vulnerable to exchange rate
Haliloglu and Berument 3

volatility since crude oil is denominated in the US dollar. Thus, the local currency to US dollar exchange
rate turns out to be a significant factor affecting the asymmetric adjustment of petroleum product prices.
Research addressing the impact of exchange rates on asymmetric price adjustments in the fuel market
is rare but growing. Among them, the works of Reilly and Witt (1998), Asplund et al. (2000), Galeotti et
al. (2003), Berument et al. (2014), Özmen and Akçelik (2017), Bagnai and Ospina (2015), Bagnai and
Ospina (2016), Ogbuabor et al. (2018) and Chen et al. (2018) documented gasoline price asymmetry due
to exchange rate changes in European countries.
This study aims to contribute to the literature on price asymmetry in different dimensions. It has been
observed that the empirical literature on price asymmetry in oil markets mostly employs gasoline prices
and that diesel prices are less often studied. Some recent articles including diesel price asymmetry are
those by Karagiannis et al. (2015), Özmen and Akçelik (2017) and Ogbuabor et al. (2018). Therefore,
this study intends to fill this gap by focusing on diesel price asymmetry in response to crude oil prices
and exchange rate shocks. Another contribution is the use of a large dataset of 27 European countries; the
analyses are performed separately for each country. Previously, Bagnai and Ospina (2016) and Chen et
al. (2018) used a large data set from 12 Eurozone countries and 27 European countries, respectively;
however, they only examined gasoline price asymmetry and did not include diesel price asymmetry in
their analyses, even though diesel (or gas oil) is more widely used petroleum product in Europe. In
addition, due to rapid changes in crude oil prices and exchange rates, there has been a recent rise in the
frequency of data employed in various studies as seen in the weekly data of Berument et al. (2014) and
Chen et al. (2018), and the daily data of Özmen and Akçelik (2017). Thus, the next contribution of our
study was the use of weekly data sets, instead of monthly data. The period covered is another distinction
of our study. Analysing the 2009–2018 period gives us the opportunity to investigate price asymmetry
after the 2008 crisis, during which sharp rises and falls were seen in crude oil prices and exchange rates.
Recently, the use of the nonlinear autoregressive distributed lags (NARDL) has been prevalent in
examining petroleum product price asymmetries. NARDL modeling performs both short- and long-run
analyses by estimating one single equation, which is superior to other multi-equation models. Moreover,
the response of the dependent variable to positive and negative shocks in the explanatory variable can be
observed through asymmetric dynamic multipliers. Additionally, contrary to other cointegration analyses,
variables integrated at different orders, I(0) or I(1), can be analysed through the use of bounds testing.
Thus, we followed the recent NARDL methodology to reap its advantages.
To the best of our knowledge, this study will be the first attempt to use NARDL methodology to study
diesel price asymmetry for such a large data set (consisting of 27 countries). In this respect, our results
coincide, to some degree, with and extend the limited literature on diesel price asymmetry. Although
some previous studies (Berument et al., 2014; Karagiannis et al., 2015; Ogbuabor et al., 2018; Özmen &
Akçelik, 2017) have documented diesel price asymmetry in France, Germany, Italy, Spain, Turkey and
the UK, the findings regarding other European countries will be the first in the literature.
The plan of the study is as follows: the second section introduces the data and explains the methodology;
the third section discusses the results of the analysis, and finally, the fourth section concludes the paper.

Methodology and Data

In this study, we have employed three variables: the weekly Brent crude oil price in US dollars/barrel,
the US dollar value of the local currency (i.e., a higher exchange rate means the appreciation of the local
4 Global Business Review

currency) and the retail price of diesel (excluding tax) for 27 European countries (Austria, Belgium,
Bulgaria, Cyprus1 Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary,
Ireland, Italy, Latvia, Lithuania, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia,
Spain, Sweden, Turkey and the UK). We obtained the Brent crude oil price, the local currency–US dollar
exchange rate and the countries’ diesel price data from the Bloomberg database. Only the diesel price
data for Turkey in Turkish Lira/litre were gathered from the Turkish Energy Market Regulatory Authority.
The weekly data set covers the period from 1 May 2009, to 2 November 2018, for all countries except
Bulgaria and Romania. For Bulgaria and Romania, the data set covers the period from 26 June 2009,
onwards. With this time span, we were able to avoid the turbulent period of the 2008 financial crisis. We
used the logarithmic form of all of the data.
The objective of this study was to search specifically for

1. the effect of US dollar-denominated Brent crude oil prices on national diesel prices in local
currency while controlling for the effect of the local currency exchange rate to the US dollar and
2. the effect of local exchange rates on national diesel prices while controlling for US dollar-
denominated Brent crude oil prices.

For this purpose, we proposed the use of the NARDL model as developed by Shin et al. (2014) to
estimate diesel prices. This model lends itself to testing the existence of the short- and long-run
asymmetric effects of international crude oil prices and exchange rates on local petroleum product prices.
One advantage of the NARDL model is its capability to simultaneously capture cointegration dynamics
along with the symmetric (linear) and asymmetric (nonlinear) relationships among the variables
(Katrakilidis & Trachanas, 2012). The other advantage is that the variables need not have the same order
of integration degrees (Pesaran et al., 2001; Shin et al., 2014).
The general linear ARDL model developed by Pesaran and Shin (1999) and Pesaran et al. (2001) was
advanced by Shin et al. (2014) to allow for the discrete effect of cumulative positive and negative changes
in the explanatory variable on the dependent variable, which is described as the asymmetric (nonlinear)
relationship between the dependent and independent variables. Thus, the equation of the NARDL model
can be written as follows:
p 1 q 1 q 1 q 1
   yt     yt 1    xt1    xt1   zt   i yt i  i xti  i xt i   i zt i   t , (1)
i 1 i 0 i 0 i 0

where yt is the dependent variable, xt is the independent variable, zt is the deterministic or control
variables (such as seasonal variables, trends, other exogenous variables with fixed lags), ε t is iid
disturbance term and

   
xt  x0  xt  xt (2)

t t t t
xt  xi  max  xi , 0  xt  xi   min  xi , 0  . (3)
i 1 i 1 i 1 i 1

The asymmetric long-run relationship between dependent and independent variables is given by

  
yt    xt    xt  ut , (4)
Haliloglu and Berument 5

where the asymmetric long-run parameters related to positive and negative effects of xt can be denoted
by     /  and      /   , respectively (Granger & Yoon, 2002; Schorderet, 2001, 2003).
 

The NARDL model given by Equation (1) is estimated by using a stepwise regression through which
the lag orders p and q are determined via the general-to-specific approach, and statistically insignificant
coefficients are dropped from the equation. After estimating the NARDL model, the existence of a
relationship between the levels of the variables can be examined using the t BDM statistic, as suggested by
Banerjee et al. (1998), by testing using the null hypothesis of H 0 :   0 against H A :   0 .
Additionally, the null hypothesis of no cointegration ( H 0 :           0 against
H A : at least one is not equal to0 ) can be tested by standard Wald test statistics ( FPSS ) following Pesaran
et al. (2001).
Long-run asymmetry can be tested by a standard Wald test (WLR) under the null hypothesis of
H 0 :      i.e., H 0 :   /      /   against H A :   /      /   .
The test for short-run asymmetry can be in two forms, pairwise (strong) and additive (weak). The test
for pairwise asymmetry includes the null hypothesis of H 0 : i  i for all i  0, , q  1 against
H A : i  i for all i  0, , q  1 . The Wald test for additive asymmetry (WSR) involves testing the
q 1 q 1 q 1 q 1
null hypothesis of H 0 : i  i against H A : i  i .
i 0 i 0 i 0 i 0

If asymmetric behaviour is found in either the short run or long run or both, the positive and the
negative dynamic multipliers are calculated to see the adjustment process of the dependent variable
when xt+ and xt− change by one unit. The respective positive and negative dynamic multipliers for xt+
and xt− can be given as follows:
h
yt  i  h
yt  i
mh   


mh  
for h  0,1, 2,  (5)
i 0 xt i  0 xt
   
where m   and m   as h   .
h h
Dynamic multipliers provide the insight into the asymmetric adjustment mechanism of the dependent
variable in response to a shock to the system starting from the initial equilibrium until the new equilibrium
state.

Analysis and Discussion

In order to apply the bounds tests following Pesaran et al. (2001), it is necessary to identify the integration
order of the variables, which should not be greater than I(1). In Table 1 (Panels A and B) show the results
of the Augmented Dickey–Fuller (ADF) (1979) and Phillips–Perron (1988) unit root tests for diesel
prices and exchange rates, respectively.
Table 1 suggests that the series are mixed in integration, either I(0) or I(1). Thus, the NARDL model
is applicable for the asymmetric adjustment analysis and the following NARDL model is estimated:
p 1
Dieselt     dieselt 1  1 oilt1  1 oilt1   2 ert1   2 ert1   i dieselt i 
  i 1
(6)
q 1 q 1 q 1 q 1


i 0

1i oilti  1i oilti  2i erti  2i erti   t
i 0 i 0 i 0
6 Global Business Review

Table 1. Unit Root Tests for Diesel Prices, Exchange Rates and Crude Oil Price.

ADF Tests1,3 Phillips–Perron Tests2,3

Level First Difference Level First difference
Intercept Intercept
Variable Intercept and Trend Intercept Intercept and Trend Intercept
Panel A: Diesel prices across countries
Austria diesel 0.848 −2.059 −7.309*** 0.576 −2.174 −7.304***
price (0.994) (0.561) (0.000) (0.988) (0.497) (0.000)
Belgium diesel −0.809 −3.937** −12.834*** −1.139 −3.772** −15.480***
price (0.811) (0.015) (0.000) (0.697) (0.023) (0.000)
Bulgaria diesel 0.354 −2.215 −5.299*** 0.571 −2.019 −5.238***
price (0.980) (0.475) (0.000) (0.988) (0.582) (0.000)
Cyprus diesel −0.017 −2.635 −6.040*** 0.333 −2.434 −5.996***
price (0.954) (0.266) (0.000) (0.979) (0.360) (0.000)
Czech Rep. 0.348 −1.765 −6.702*** 0.222 −1.883 −6.950***
diesel price (0.980) (0.713) (0.000) (0.973) (0.654) (0.000)
Denmark diesel −0.251 −2.647 −8.309*** −0.177 −2.582 −8.298***
price (0.927) (0.261) (0.000) (0.936) (0.290) (0.000)
Estonia diesel −1.994 −2.606 −11.196*** −1.777 −2.607 −11.321***
price (0.289) (0.279) (0.000) (0.389) (0.279) (0.000)
Finland diesel 0.617 −3.027 −11.388*** 0.580 −2.843 −11.382***
price (0.989) (0.131) (0.000) (0.988) (0.187) (0.000)
France diesel −0.425 −2.854 −6.708*** 0.047 −2.362 −6.611***
price (0.899) (0.183) (0.000) (0.960) (0.396) (0.000)
Germany diesel 1.265 −1.332 −7.914*** 1.195 −1.387 −7.914***
price (0.998) (0.873) (0.000) (0.998) (0.858) (0.000)
Greece diesel 0.030 −2.583 −5.520*** 0.414 −2.399 −5.484***
price (0.958) (0.289) (0.000) (0.983) (0.377) (0.000)
Hungary diesel −0.131 −2.388 −8.919*** −0.111 −2.401 −8.919***
price (0.942) (0.383) (0.000) (0.944) (0.376) (0.000)
Ireland diesel −0.257 −2.147 −16.524*** −0.931 −3.427* −16.524***
price (0.926) (0.512) (0.000) (0.774) (0.055) (0.000)
Italy diesel −0.208 −2.558 −5.140*** 0.183 −2.263 −5.186***
price (0.932) (0.300) (0.000) (0.970) (0.449) (0.000)
Latvia diesel −0.324 −2.277 −10.491*** −0.227 −2.229 −10.399***
price (0.916) (0.441) (0.000) (0.930) (0.467) (0.000)
Lithuania diesel −0.030 −2.632 −7.068*** 0.284 −2.219 −7.044***
price (0.953) (0.268) (0.000) (0.976) (0.473) (0.000)
Malta diesel −0.412 −1.471 −9.055*** −0.412 −1.471 −9.055***
price (0.901) (0.832) (0.000) (0.901) (0.832) (0.000)
Netherlands −0.307 −2.631 −7.728*** −0.307 −2.631 −7.693***
diesel price (0.918) (0.268) (0.000) (0.918) (0.268) (0.000)
Poland diesel 0.161 −2.186 −8.007*** −0.214 −2.424 −8.219***
price (0.968) (0.491) (0.000) (0.932) (0.365) (0.000)
(Table 1 continued)
Haliloglu and Berument 7

(Table 1 continued)
ADF Tests1,3 Phillips–Perron Tests2,3
Level First Difference Level First difference
Intercept Intercept
Variable Intercept and Trend Intercept Intercept and Trend Intercept
Portugal diesel −0.576 −3.066 −6.370*** −0.191 −2.534 −6.283***
price (0.869) (0.121) (0.000) (0.935) (0.311) (0.000)
Romania diesel −0.362 −2.441 −7.868*** −0.362 −2.441 −7.871***
price (0.910) (0.356) (0.000) (0.910) (0.356) (0.000)
Slovakia diesel 0.420 −2.287 −7.476*** 0.266 −2.287 −7.484***
price (0.983) (0.436) (0.000) (0.975) (0.436) (0.000)
Slovenia diesel 0.086 −3.220* −6.488*** 0.491 −2.672 −5.855***
price (0.963) (0.088) (0.000) (0.986) (0.251) (0.000)
Spain diesel −0.276 −2.797 −5.758*** 0.026 −2.415 −5.732***
price (0.923) (0.203) (0.000) (0.958) (0.369) (0.000)
Sweden diesel −0.634 −2.074 −7.883*** −0.700 −2.312 −7.883***
price (0.856) (0.552) (0.000) (0.840) (0.423) (0.000)
Turkey diesel 0.057 −2.817 −9.211*** 0.082 −2.817 −9.213***
price (0.960) (0.196) (0.000) (0.963) (0.196) (0.000)
UK diesel price 0.375 −2.745 −8.632*** 0.353 −2.767 −8.653***
(0.981) (0.222) (0.000) (0.980) (0.214) (0.000)
Panel B: Exchange rates
Euro–US dollar −2.688* −1.593 −2.617* −1.620
exch. rate (0.080) (0.788) (0.094) (0.777)
Bulgarian Lev– −2.686* −1.591 −2.615* −1.618
US dollar exch. (0.081) (0.788) (0.094) (0.777)
rate
Czech Koruna– −2.813* −1.511 −2.852* −1.511
US dollar exch. (0.061) (0.818) (0.056) (0.818)
rate
Danish Krone– −2.237 −1.198 −7.073*** −2.216 −1.198 −7.090***
US dollar exch. (0.195) (0.904) (0.000) (0.202) (0.904) (0.000)
rate
Hungarian −1.773 −1.728 −7.098*** −1.684 −1.747 −7.034***
Forint–US (0.391) (0.730) (0.000) (0.436) (0.721) (0.000)
dollar exch.
rate
Polish Zloty– −2.028 −1.538 −7.610*** −2.053 −1.535 −7.610***
US dollar exch. (0.275) (0.808) (0.000) (0.264) (0.810) (0.000)
rate
Romanian Leu– −2.218 −1.722 −7.939*** −2.243 −1.722 −7.906***
US dollar exch. (0.202) (0.733) (0.000) (0.193) (0.733) (0.000)
rate
(Table 1 continued)
8 Global Business Review

(Table 1 continued)
ADF Tests1,3 Phillips–Perron Tests2,3
Level First Difference Level First difference
Intercept Intercept
Variable Intercept and Trend Intercept Intercept and Trend Intercept
Swedish −1.205 −1.599 −7.018*** −1.009 −1.667 −6.905***
Krona–US (0.669) (0.785) (0.000) (0.747) (0.757) (0.000)
dollar exch.
rate
Turkish Lira– −0.295 −2.174 −6.343*** −0.265 −2.136 −6.531***
US dollar exch. (0.920) (0.497) (0.000) (0.925) (0.518) (0.000)
rate
UK Sterling–US −2.137 −1.454 −6.907*** −2.042 −1.367 −6.266***
dollar exch. (0.231) (0.837) (0.000) (0.269) (0.863) (0.000)
rate
Brent crude oil −0.988 −2.842 −6.637*** −0.765 −2.272 −6.553***
price (0.754) (0.187) (0.000) (0.823) (0.444) (0.000)
Sources: The authors. Bloomberg Database and the Turkish Energy Market Regulatory Authority.
Notes: ***, ** and * Indicate significance at 1%, 5% and 10%, respectively.
1 The optimal lag order is selected by the Schwarz information criterion.
2 Spectral estimation method is selected as Bartlett kernel. Bandwidth selection method is Newey-West Bandwidth.
3 Table values are t-statistics and numbers in parentheses are MacKinnon (1996) one-sided p-values.

where diesel, oil and er refer to the diesel price, crude oil price and exchange rate, respectively. The ‘+’
and ‘−’ superscripts stand for the cumulative positive and negative changes in the corresponding variables
as in Equation (3).
In Table 2 (panel A) gives the test statistics on the long-run relationship among diesel prices, crude oil
prices and exchange rates as gathered by estimating Equation (6).2 Panel B is for the test statistics on the
asymmetric effect of crude oil price changes on diesel prices, and Panel C shows that of exchange rate
changes on diesel prices.
Following Shin et al. (2014), we employed tBDM and FPSS test statistics for the existence of a long-run
relationship among the variables. The tBDM test statistic, according to Banerjee et al. (1998), is compared to
the asymptotic critical value bounds computed by Pesaran et al. (2001), with k = 2 (number of explanatory
variables). The tBDM test statistics given in panel A of Table 2 indicate the existence of a long-run relationship
at the 1% significance level among diesel price, crude oil price and the exchange rate for all the countries
(only Malta is at the 5% significance level). Similarly, the FPSS test statistics of Pesaran et al. (2001) displayed
in panel A of Table 2 suggest the existence of cointegration relationships at several significance levels
among the variables in all countries except Estonia and Sweden. These findings are in line with those of
Berument et al. (2014), Bagnai and Ospina (2015), Bagnai and Ospina (2016) and Ogbuabor et al. (2018).
Panel B of Table 2 reports the long- and short-run asymmetry properties of diesel prices in response
to crude oil price changes. WLR test statistics for long-run asymmetry, given in the first column of panel
B, indicate that diesel prices have significant asymmetric responses to crude oil price changes in Austria,
Belgium, Bulgaria, Cyprus, Denmark, Germany, Hungary, Latvia, Lithuania, Malta, the Netherlands,
Romania and Spain in the long run. Diesel prices for the remaining countries do not show the asymmetric
adjustment. Long-run asymmetry is consistent with the findings of Bagnai and Ospina (2016) for 12
Eurozone countries (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,
the Netherlands, Portugal and Spain).
Table 2. Asymmetric Effects of Crude Oil Price and Exchange Rate Changes on Diesel Prices.

Panel A: Long-run Panel B: Asymmetric Effects of Crude Oil Price Panel C: Asymmetric Effects of Exchange Rate
Relationship Tests Changes Changes
Long-run Short-run Long-run Short-run
Asymmetry Asymmetry Asymmetry Asymmetry
Country tBDM(1) FPSS(2) WLR(3) WSR(4) L+(5) L−(6) WLR(3) WSR(4) L+(5) L−(6)
Austria −8.610*** 20.182*** 13.076*** 35.274*** 0.701*** 0.751*** 23.689*** 1.618 −0.839*** −1.051***
(12 lag) (0.000) (0.000) (0.000) (0.000) (0.000) (0.204) (0.000) (0.000)
Belgium −9.818*** 29.595*** 3.003* 37.083*** 0.815*** 0.849*** 2.803* n.a.(7) −1.208*** −1.313***
(6 lag) (0.084) (0.000) (0.000) (0.000) (0.095) (0.000) (0.000)
Bulgaria −6.870*** 11.777*** 62.904*** 5.037** 0.480*** 0.783*** 67.861*** 0.132 −0.468** −1.473***
(11 lag) (0.000) (0.025) (0.000) (0.000) (0.000) (0.716) (0.048) (0.000)
Cyprus −10.096*** 31.925*** 11.135*** 57.538*** 0.745*** 0.798*** 16.134*** 0.338 −0.898*** −1.100***
(12 lag) (0.001) (0.000) (0.000) (0.000) (0.000) (0.561) (0.000) (0.000)
Czech Rep. −9.138*** 24.275*** 0.710 0.001 0.757*** 0.775*** 0.454 7.086*** −1.056*** −1.094***
(12 lag) (0.400) (0.973) (0.000) (0.000) (0.501) (0.008) (0.000) (0.000)
Denmark −7.393*** 13.488*** 20.766*** 14.362*** 0.611*** 0.693*** 33.716*** 0.527 −0.667*** −1.000***
(11 lag) (0.000) (0.000) (0.000) (0.000) (0.000) (0.468) (0.000) (0.000)
Estonia −4.323*** 4.010 0.036 0.543 0.700*** 0.689*** 0.004 2.432 −1.112*** −1.124***
(6 lag) (0.850) (0.462) (0.000) (0.000) (0.949) (0.120) (0.002) (0.000)
Finland −9.276*** 23.067*** 0.120 12.684*** 0.734*** 0.725*** 0.027 15.639*** −0.873*** −0.886***
(8 lag) (0.729) (0.000) (0.000) (0.000) (0.871) (0.000) (0.000) (0.000)
France −4.505*** 4.612* 0.727 1.492 0.813*** 0.791*** 0.012 10.172*** −0.854*** −0.846***
(11 lag) (0.394) (0.223) (0.000) (0.000) (0.912) (0.002) (0.000) (0.000)
Germany −6.915*** 11.972*** 4.013** 9.298*** 0.781*** 0.823*** 3.911** 21.158*** −1.209*** −1.342***
(12 lag) (0.046) (0.002) (0.000) (0.000) (0.049) (0.000) (0.000) (0.000)
Greece −10.950*** 32.867*** 0.441 27.945*** 0.677*** 0.687*** 2.180 20.520*** −0.952*** −1.023***
(12 lag) (0.507) (0.000) (0.000) (0.000) (0.141) (0.000) (0.000) (0.000)
Hungary −6.578*** 9.121*** 14.095*** 1.512 0.624*** 0.671*** 25.444*** 17.797*** −0.643*** −0.802***
(10 lag) (0.000) (0.219) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Ireland −9.445*** 21.158*** 1.681 3.748* 0.709*** 0.740*** 2.119 n.a.(7) −0.913*** −1.026***
(8 lag) (0.196) (0.054) (0.000) (0.000) (0.146) (0.000) (0.000)
Italy −10.001*** 30.144*** 0.023 47.174*** 0.814*** 0.817*** 0.002 20.323*** −1.035*** −1.037***
(11 lag) (0.880) (0.000) (0.000) (0.000) (0.969) (0.000) (0.000) (0.000)
(Table 2 continued)
(Table 2 continued)

Panel A: Long-run Panel B: Asymmetric Effects of Crude Oil Price Panel C: Asymmetric Effects of Exchange Rate
Relationship Tests Changes Changes
Long-run Short-run Long-run Short-run
Asymmetry Asymmetry Asymmetry Asymmetry
Country tBDM(1) FPSS(2) WLR(3) WSR(4) L+(5) L−(6) WLR(3) WSR(4) L+(5) L−(6)
Latvia −9.299*** 20.234*** 5.965** 15.300*** 0.763*** 0.818*** 6.751*** 11.247*** −1.020*** −1.206***
(12 lag) (0.015) (0.000) (0.000) (0.000) (0.010) (0.001) (0.000) (0.000)
Lithuania −12.926*** 43.656*** 39.373*** 26.051*** 0.711*** 0.807*** 38.489*** 1.008 −1.003*** −1.305***
(12 lag) (0.000) (0.000) (0.000) (0.000) (0.000) (0.316) (0.000) (0.000)
Malta −3.735** 7.359*** 4.020** 2.676 0.549*** 0.729*** 2.709 6.519** −0.982* −1.475***
(11 lag) (0.046) (0.103) (0.000) (0.000) (0.101) (0.011) (0.057) (0.000)
Netherlands −5.357*** 6.347** 3.013* 0.418 0.727*** 0.773*** 5.747** 13.555*** −0.817*** −1.017***
(12 lag) (0.083) (0.518) (0.000) (0.000) (0.017) (0.000) (0.000) (0.000)
Poland −9.125*** 22.115*** 1.913 20.044*** 0.666*** 0.689*** 5.966** 9.938*** −0.922*** −1.017***
(12 lag) (0.167) (0.000) (0.000) (0.000) (0.015) (0.002) (0.000) (0.000)
Portugal −5.045*** 6.777*** 0.338 1.488 0.793*** 0.772*** 0.665 1.171 −1.370*** −1.277***
(12 lag) (0.561) (0.223) (0.000) (0.000) (0.415) (0.280) (0.000) (0.000)
Romania −8.351*** 17.047*** 3.557* 12.016*** 0.679*** 0.702*** 13.393*** 24.799*** −0.753*** −0.881***
(12 lag) (0.060) (0.001) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Slovakia −10.571*** 31.851*** 0.779 5.023** 0.791*** 0.809*** 2.311 6.375** −1.075*** −1.175***
(12 lag) (0.378) (0.026) (0.000) (0.000) (0.129) (0.012) (0.000) (0.000)
Slovenia −7.594*** 14.161*** 0.479 7.730*** 0.822*** 0.839*** 1.612 22.567*** −0.796*** −0.892***
(12 lag) (0.489) (0.006) (0.000) (0.000) (0.205) (0.000) (0.000) (0.000)
Spain −7.608*** 13.397*** 11.891*** 21.431*** 0.695*** 0.741*** 18.208*** 8.137*** −0.827*** −1.008***
(12 lag) (0.001) (0.000) (0.000) (0.000) (0.000) (0.005) (0.000) (0.000)
Sweden −4.276*** 3.920 2.353 0.830 0.794*** 0.713*** 0.088 1.185 −0.764*** −0.725**
(10 lag) (0.126) (0.363) (0.000) (0.000) (0.767) (0.277) (0.003) (0.015)
Turkey −5.660*** 7.594*** 0.026 5.239** 0.718*** 0.723*** 0.934 0.003 −0.706*** −0.782***
(10 lag) (0.871) (0.023) (0.000) (0.000) (0.334) (0.954) (0.000) (0.000)
UK −4.539*** 6.081** 0.712 17.013*** 0.793*** 0.871*** 1.271 0.103 −0.756*** −1.086***
(12 lag) (0.399) (0.000) (0.000) (0.000) (0.260) (0.749) (0.000) (0.001)
Sources: The authors. Bloomberg Database and the Turkish Energy Market Regulatory Authority.
Notes: Numbers in parentheses are p-values. ***, ** and * Indicate significance at 1%, 5% and 10%, respectively. (1). BDM test statistic. (2). PSS test statistic. (3). Wald
test statistic for long-run asymmetry. (4). Wald test statistic for short-run asymmetry. (5). Long-run coefficient of positive partial sum processes. (6). Long-run coefficient
of negative partial sum processes. (7). Wald test for short-run asymmetry is not applicable due to estimated model parameters.
Haliloglu and Berument 11

The additive short-run asymmetry, denoted by the WSR test statistics, is reported in the second column
of panel B. In the short run, diesel prices in Austria, Belgium, Bulgaria, Cyprus, Denmark, Finland,
Germany, Greece, Ireland, Italy, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia, Spain, Turkey
and the UK move asymmetrically against crude oil price changes at various significance levels. For the
remaining countries, asymmetry is not observed in the short run. Short-run symmetry is in line with the
evidence supported by Bagnai and Ospina (2016). The long-run coefficients of positive and negative
changes in crude oil price, denoted by the and , are reported in the third and fourth columns of panel B
of Table 2, respectively. All coefficients are found to be positive at the 1% significance level, pointing to
a long-run positive relationship between diesel prices and crude oil prices. In the literature, partially
parallel to our findings, Apergis and Vouzavalis (2018), Polemis and Fotis (2015), Kristoufek and
Lunackova (2015), Clerides (2010), Grasso and Manera (2007) and Galeotti et al. (2003) reported mixed
evidence of price asymmetry in several European countries.
As for the long- and short-run asymmetry properties of diesel prices with respect to exchange rate
changes, the corresponding statistics are given in panel C of Table 2. The WLR test statistics given in
panel C document the long-run asymmetry for Austria, Belgium, Bulgaria, Cyprus, Denmark, Germany,
Hungary, Latvia, Lithuania, the Netherlands, Poland, Romania and Spain in response to exchange rate
shocks. In contrast, an asymmetric adjustment is not detected for the remaining countries in our sample.
Likewise, parallel to our findings, Bagnai and Ospina (2016) found asymmetric long-run adjustment in
12 Eurozone countries excluding France, the Netherlands and Portugal.
The additive short-run asymmetric WSR test statistics are reported in the second column of panel C.
Accordingly, while asymmetric responses of diesel prices to exchange rate shocks were observed in the
Czech Republic, Finland, France, Germany, Greece, Hungary, Italy, Latvia, Malta, the Netherlands,
Poland, Romania, Slovakia, Slovenia and Spain, asymmetry could not be observed in the remaining
countries. Confirming our findings, Bagnai and Ospina (2016) found evidence of symmetric short-run
gasoline price adjustment in response to exchange rate shocks in 12 Eurozone countries. and statistics,
the corresponding positive and negative long-run coefficients of exchange rate shocks, are given in the
third and fourth columns of panel C, respectively. All coefficients are found to be significant at the 1%
level, except Bulgaria, Malta and Sweden, for which significance levels are 5%, 10% and 5%, respectively.
The sign of long-run coefficients indicates a negative relationship between diesel prices and the exchange
rate, that is, a rise in the exchange rate (appreciation) leads to lower diesel prices, while a fall in the
exchange rate (depreciation) increases diesel prices.
In order to explore the effect of changes in crude oil prices and exchange rates on diesel prices over time,
we employed dynamic asymmetric (or nonlinear) multipliers, given by Equation (5). Appendices A and B
depict 80-period dynamic asymmetric multipliers for changes in crude oil prices and exchange rates,
respectively. The solid (dashed) black line shows the dynamic multiplier when there is an increase (decrease)
in the crude oil price (Appendix A) or exchange rate (Appendix B). The bold broken red line reports the
differences between the solid and dashed black lines. The upper and lower light dotted red lines are the 90%
confidence intervals of the differences. If the null hypothesis that the solid broken red line is equal to zero
is rejected, then we can conclude that there is a positive or negative asymmetry for the relevant period.
Appendix A reports the dynamic multipliers that allow the assessment of the short- and long-run
effects of crude oil price changes on diesel prices. In the short run, the effect of a rise in the price of crude
oil overrides that of a decrease, suggesting the positive asymmetric behaviour of diesel prices. In the
long run, however, positive asymmetry fades away and either it is insignificant or, when statistically
significant, it is negative, thereby indicating asymmetry. In short, while positive crude oil price shocks
are effective in the short run, this asymmetric impact alleviates them in the long run. In other words, the
‘rockets and feathers’ hypothesis is supported in the short run but not in the long run. This evidence is in
12 Global Business Review

line with the findings of Kristoufek and Lunackova (2015), Polemis and Fotis (2015), Bermingham and
O’Brien (2011), Clerides (2010) and Galeotti et al. (2003).
The short- and long-run effects of exchange rate changes are displayed in Appendix B. As the local
currency, that is, the US dollar exchange rate increases (the local currency appreciates), the price of
diesel decreases and vice versa. In general, the figures in Appendix B show that exchange rate depreciation
is dominant over appreciation in the short run. In the long run, however, the effect of exchange rate
depreciation loses its strength to some degree but remains statistically significant or dies out. In that
sense, long-run asymmetry conforms to the findings of Bagnai and Ospina (2016); however, our short-
run asymmetric adjustment argument does not agree with the short-run symmetric adjustment findings
of Bagnai and Ospina (2016). Table 3 summarizes the findings concerning the behaviour of diesel prices
in response to crude oil price and exchange rate shocks in the short and long run, as determined from the
dynamic multipliers.
Despite having some mixed results, our findings overall support the ‘rockets and feathers’ phenomenon
to the degree that diesel prices in the short run give a greater response to increases than decreases in
crude oil prices. In the long run, either the impact of the increase in crude oil price dies out, or the
influence gets reversed. Compared to the evidence provided by Bagnai and Ospina (2016) for gasoline
price adjustment in 12 Eurozone countries, our results contrast both in the short- and long-run analysis.
As for exchange rate shocks, depreciation of exchange rates is more dominant in the short run,
suggesting escalating diesel prices, which is in line with the findings of Reilly and Witt (1998), Asplund
et al. (2000), Galeotti et al. (2003), Berument et al. (2014) and Özmen and Akçelik (2017). In the long
run, either the effect of depreciation remained significant with some degree of reduction, as Bagnai and
Ospina (2016) found for 12 Eurozone countries, or it faded away. Only Germany and Malta presented
negative short-run asymmetry in response to exchange rate shocks, as opposed to typical movements in
other countries, meaning that in the short run, exchange rate appreciation has more influence over diesel
prices than depreciation in Germany and Malta.

Conclusion
In this study, we explored the short- and long-run asymmetric adjustment properties of pre-tax diesel
prices to crude oil price and exchange rate changes in 27 European countries using a NARDL model.
Despite having mixed results, we found evidence supporting the ‘rockets and feathers’ phenomenon so
that, in the short run, diesel prices respond more to crude oil price increases than to their decreases. In
the long run, however, either this effect vanishes or the effect of decreases in crude oil prices on diesel
prices exceeds that of the increases. As for exchange rate shocks, depreciation of the local currency
against the US dollar has more effect on diesel prices than appreciation in the short and long run. Thus,
although we have some mixed results, it can be generalized that diesel prices adjust asymmetrically in
response to changes in crude oil prices and exchange rates in the short and long-run. As regards the size
of the adjustment, the average long-run coefficients of positive and negative charges of the crude oil
price are 0.721 and 0.762, whereas those of exchange rate are −0.908 and −1.073, respectively. Put
differently, a 1% positive (negative) shock in crude oil price generates an almost 0.72% increase or
0.76% decrease in diesel prices, prevailing negative asymmetry in the long run. As for the exchange rate,
pass-through to diesel prices, a 1% appreciation (depreciation) in exchange rate yields a 0.91% (1.07%)
decrease (increase) in diesel prices, indicating positive asymmetry in the long run. Moreover, diesel
prices are more sensitive to exchange rate changes than to crude oil price changes, and this result is the
same across all countries considered. Thus, the long-term effects of exchange rate shocks might be more
severe than those of crude oil shocks with regard to diesel price adjustments in 27 European countries.
Haliloglu and Berument 13

Table 3. Effects of Crude Oil Price and Exchange Rate Shocks on Diesel Prices in the Short and Long Run

Crude Oil Price Shocks Exchange Rate Shocks

Country Short Run Long Run Short Run Long Run
Austria Positive asym*** Negative asym*** Positive asym***
Belgium Positive asym*** Negitive asym* Positive asym*
Bulgaria Positive asym** Negative asym*** Positive asym***
Cyprus Positive asym*** Negative asym*** Positive asym***
Czech Rep. Positive asym***
Denmark Positive asym*** Negative asym*** Positive asym***
Estonia
Finland Positive asym*** Positive asym***
France Positive asym***
Germany Positive asym*** Negative asym** Negative asym*** Positive asym**
Greece Positive asym*** Positive asym***
Hungary Negative asym*** Positive asym*** Positive asym***
Ireland Negative asym*
Italy Positive asym*** Positive asym***
Latvia Positive asym*** Negative asym** Positive asym*** Positive asym***
Lithuania Positive asym*** Negative asym*** Positive asym***
Malta Negative asym** Negative asym**
The Netherlands Negative asym* Positive asym*** Positive asym**
Poland Positive asym*** Positive asym*** Positive asym**
Portugal
Romania Positive asym*** Negative asym* Positive asym*** Positive asym***
Slovakia Positive asym** Positive asym**
Slovenia Positive asym*** Positive asym***
Spain Positive asym*** Negative asym*** Positive asym*** Positive asym***
Sweden
Turkey Positive asym**
The UK Positive asym***
Sources: The authors. Bloomberg Database and the Turkish Energy Market Regulatory Authority.
Notes: ***, ** and * Indicate significance at 1%, 5% and 10%, respectively.

Countries have more power to influence their exchange rates through their monetary and fiscal
policies than the world crude oil prices. Since exchange rate asymmetry has a higher level of influence
on pre-tax diesel prices than the crude oil asymmetries, exchange rate stability is an important factor in
the asymmetric responses of diesel prices. Policy makers may adopt different policies to promote
exchange rate stability. Moreover, the asymmetric effects of crude oil prices on pre-tax diesel prices are
short-lived; either the asymmetry disappears or gets reversed in the long run. Thus, policymakers may
not like to adjust their tax codes to eliminate the adverse effects of crude oil price volatilities.
14 Global Business Review

Appendix A.
Dynamic Multipliers for Crude Oil Price Changes.
.8 1.5

1.0
.4
0.5
.0
0.0
-.4
-0.5

-.8 -1.0

Austria Belgium

.8 1.0

.4 0.5

.0 0.0

-.4 -0.5

-.8 -1.0

Bulgaria Cyprus

.8 .8

.4 .4

.0 .0

-.4 -.4

-.8 -.8

Czech Rep. Denmark

Haliloglu and Berument 15

.8 .8

.4 .4

.0 .0

-.4 -.4

-.8 -.8

Estonia Finland

1.0 1.0

0.5 0.5

0.0 0.0

-0.5 -0.5

-1.0 -1.0

France Germany

.8 .8

.4 .4

.0 .0

-.4 -.4

-.8 -.8

Greece Hungary
16 Global Business Review

.8 1.0

.4 0.5

.0 0.0

-.4 -0.5

-.8 -1.0

Ireland Italy

1.0 1.0

0.5 0.5

0.0 0.0

-0.5 -0.5

-1.0 -1.0

Latvia Lithuania

.8 .8

.4 .4

.0 .0

-.4 -.4

-.8 -.8

Malta Netherlands
Haliloglu and Berument 17

1.0 1.0

0.5 0.5

0.0 0.0

-0.5 -0.5

-1.0 -1.0

Poland Portugal

.8 1.0

.4 0.5

.0 0.0

-.4 -0.5

-.8 -1.0

Romania Slovakia

1.0 .8

0.5 .4

0.0 .0

-0.5 -.4

-1.0 -.8

Slovenia Spain
18 Global Business Review

1.0 .8

0.5 .4

0.0 .0

-0.5 -.4

-1.0 -.8

Sweden Turkey

1.0

0.5

0.0

-0.5

-1.0

UK

Sources: The authors. Bloomberg Database and the Turkish Energy Market Regulatory Authority.
Haliloglu and Berument 19

Appendix B.
Dynamic Multipliers for Exchange Rate Changes.
1.5 2

1.0
1
0.5
0
0.0
-1
-0.5

-1.0 -2

Austria Belgium

1.5 1.5

1.0 1.0

0.5 0.5

0.0 0.0

-0.5 -0.5

-1.0 -1.0

Bulgaria Cyprus

1.2 1.2
0.8 0.8
0.4
0.4
0.0
0.0
-0.4
-0.8 -0.4

-1.2 -0.8

Czech Rep. Denmark

20 Global Business Review

1.5 1.5
1.5
1.0 1.2
1.0
0.5
1.0 0.8
0.5
0.0 0.4
0.5
0.0
0.0
-0.5
0.0
-1.0 -0.5
-0.4
-0.5 -0.8
-1.5 -1.0
-1.0 -1.2
Estonia Finland

Ireland Italy
1.5 2
2 1.5
1.0 1
1.0
1
0.5
00.5
0.0
0 0.0
-1
-0.5 -0.5
-1
-1.0 -1.0
-2
-2 -1.5
France Germany

Latvia Lithuania
1.5 1.2
1.5 1.5
1.0 0.8
1.0 1.0
0.5 0.4
0.5
0.5
0.0
0.0 0.0
0.0
-0.5
-0.5 -0.4
-1.0 -0.5
-1.0 -0.8
-1.5 -1.0
Greece Hungary

Malta Netherlands
Haliloglu and Berument 21

1.5 2

1.0
1
0.5
0
0.0
-1
-0.5

-1.0 -2

Poland Portugal

1.0 1.2
0.8
0.5
0.4
0.0 0.0
-0.4
-0.5
-0.8
-1.0 -1.2

Romania Slovakia

1.5 1.5

1.0 1.0

0.5 0.5

0.0 0.0

-0.5 -0.5

-1.0 -1.0

Slovenia Spain
22 Global Business Review

1.5 1.5

1.0 1.0

0.5 0.5

0.0 0.0

-0.5 -0.5

-1.0 -1.0

Sweden Turkey

1.2

0.8

0.4

0.0

-0.4

-0.8

UK

Sources: The authors. Bloomberg Database and the Turkish Energy Market Regulatory Authority.

Acknowledgements
The authors are grateful to Anita Akkaş, Tara Sylvestre and the anonymous referees of the journal for their extremely
useful suggestions to improve the quality of the article. The usual disclaimers apply.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of
this article.

Funding
The authors received no financial support for the research, authorship and/or publication of this article.

Notes
1. In 1983, the northern part of Cyprus declared its independence under the name of the Turkish Republic of
Northern Cyprus. The southern part of Cyprus is officially called the Republic of Cyprus by the European Union,
which it joined in 2004. While the Turkish Republic of Northern Cyprus uses Turkish Lira as its currency, the
Haliloglu and Berument 23

Greek Administrated Southern Cyprus (Republic of Cyprus here) uses Euro. Since the available data are from
the Republic of Cyprus, which uses the Euro as a medium of exchange, we have labelled the data as Cyprus.
2. We estimated the correlation coefficients between the percentage changes in exchange rate and the crude oil
prices for 27 European countries (not reported). The highest correlation coefficient was 31.5%. This is below
the conventional levels of correlation coefficients for multicollinearity, so we can claim that multicollinearity is
not a problem for our estimates.

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