Competition and Innovation: Evidence from Financial Services

In this paper we seek to contribute to the literature on competition and innovation by focusing on individual firms within the U.S. banking industry in the period 1984-2004. We measure innovation by estimating technology gaps and find evidence of an inverted-U relationship between competition and the technology gaps in banking. This finding is robust over several different specifications and is consistent with theoretical and empirical work by Aghion, Bloom, Blundell, Griffith, and Howitt (2005b). The optimal amount of innovation requires a slightly positive mark up. Also, we find that the U.S. banking industry as a whole has consolidated beyond this optimal innovation level and that state-level interstate banking deregulation has lowered innovation.competition, innovation, stochastic frontier analysis, technology gap ratio, banking

A Fallacy of Division: The Failure of Market Concentration as a Measure of Competition in U.S. Banking

Empirical literature and related legal practice using concentration as a proxy for competition measurement are prone to a fallacy of division, as concentration measures are appropriate for perfect competition and perfect collusion but not intermediate levels of competition. Extending the classic Cournot-type competition model of Cowling and Waterson (1976) and Cowling (1976) used to derive the Hirschman-Herfindahl Index (HHI) of market concentration, we propose an adaptation of this model that allows collusive rents for all, none, or some of the firms in a market. Application of our model to data for U.S. commercial banks in the period 1984-2004 confirms that concentration measures are unreliable competition metrics. While collusion is prevalent in the banking industry at the state level, the critical market shares at which market power is achieved, rents earned from collusion, and collusive concentration levels vary widely across states. These and other results lead us to conclude that a fallacy of division exists in concentration-based competition tests.SCP hypothesis, competition, Cournot, conjectural variation, efficiency hypothesis

Better Not Forget : On the Memory of S&P 500 Survivor Stock Companies

This study explores the dependency structure of S&P 500 survivor stocks. Using a hand-collected sample of stocks that survived in the S&P 500 since March 1957, we employ rescaled/range analysis to investigate survivors. First, we find nonlinearities in the return processes of survivor stocks due to Paretian tails. Second, the return processes of very long-lived outliers exhibit long-term memories with Hurst exponents that significantly exceed one half on average. Third, sample-split tests reveal that the memory on average has virtually not changed over time—that is, survivor stocks do not forget. Fourth, and last, the long-term memory of survivor stocks appears to be unrelated to their exposures to traditional asset pricing risk factors.© 2023 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https://creativecommons.org/licenses/by/4.0/).fi=vertaisarvioitu|en=peerReviewed

Factor momentum, option-implied volatility scaling, and investor sentiment

Factor momentum produces robust average returns that exhibit a similar economic magnitude as stock price momentum. To the extent that the post-earnings announcement drift (PEAD) factor captures mispricing, winner factors earn profits from being long on underpriced stocks and short on overpriced stocks. Conversely, loser-factors’ negative exposure to the PEAD factor suggests that loser factors capture mispricing by being long on overpriced stocks and short on underpriced stocks. Option-implied volatility scaling increases both the economic magnitude and statistical significance of factor momentum. Factor momentum is not exposed to the same crashes as stock price momentum and therefore could provide a hedge for stock price momentum crash risks. Also, factor momentum mispricing is more pronounced when investor sentiment is high.© The Author(s) 2021. This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/.Open access funding provided by University of Vaasa (UVA).fi=vertaisarvioitu|en=peerReviewed

Computing and testing a stable common currency for Mercosur countries

This paper develops a stable common currency for mid-sized open monetary economies with incomplete markets in general and the Mercosur countries in particular. The proposed currency is constructed as a derivative of a dynamic portfolio of securities that proxies the nominal exchange risk factors for a set of monies and floats against the rest of the world’s currencies. We find that the resulting optimal common currency is comprised of currencies with country weights that are statistically significant and fairly symmetrical with relatively equal weight (e.g., 22% Argentinean pesos, 27% Brazilian reals, 27% Chilean pesos, and 23% Uruguayan pesos). We also find that increasing the number of countries in a common currency tends to increase its stability. The willingness of Mercosur countries to participate in a monetary union is assessed from statistical moments of the density functions of the implied stable common currency and its components.stable common currency, open monetary economies, regime switching models, Mercosur, currency basket

The North American Free Trade Agreement: A Market Analysis

The North American Free Trade Agreement (NAFTA) was the subject of heated debate in the United States Congress. The central issue of the debate was whether NAFTA would have a positive or negative economic impact on the parties to the treaty. This Article is a direct empirical market analysis that measures the perceived economic impact of NAFTA on the parties to the agreement and other states. The authors use stock market event analysis to study the effect of NAFTA on different sectors of the economy of the United States, Mexico, Canada, Europe, and the Asia/Pacific region. In doing so, the authors test the hypothetical predictions of other scholars and conclude that, contrary to speculation, NAFTA has had no meaningful economic impact on the economies of the United States and Canada, a strong positive economic effect on Mexico\u27s economy, a slight positive economic effect on Europe, and a slight negative economic effect on the Asia/Pacific region

Further evidence on long-run abnormal returns after corporate events

This paper investigates abnormal standardized returns (ASRs) after major corporate events. Dutta, Knif, Kolari, and Pynnonen (2018) have shown that the ASR t-test has superior size and power compared to traditional test statistics. Based on this new test statistic compared to traditional test methods, we re-examine long-run abnormal returns after mergers and acquisitions, initial public offerings, seasoned equity offerings, dividend initiations, stock repurchases, stock splits, and reverse stock splits. While some recent studies report disappearing long-run event effects over time, our ASR tests in different subperiods from 1980 to 2015 detect significant long-run abnormal returns after these corporate actions. Graphical analyses of ASRs further support our statistical test results. We conclude that long-run abnormal returns persist after major corporate events.©2020 Elsevier. This manuscript version is made available under the Creative Commons Attribution–NonCommercial–NoDerivatives 4.0 International (CC BY–NC–ND 4.0) license, https://creativecommons.org/licenses/by-nc-nd/4.0/fi=vertaisarvioitu|en=peerReviewed