Ian Domowitz

Business Cycles and the Relationship Between Concentration and Price-Cost Margins

Using a newly constructed panel data base, we examine changes in price-cost margins in 284 manufacturing industries between 1958 and 1981. A key finding is a dramatic narrowing of the spread between the margins of concentrated and unconcentrated industries over this period. We provide evidence that this narrowing is a result of the greater sensitivity of price-cost margins in more concentrated industries to demand fluctuations. This finding is robust to the inclusion of other industry variables and to measures of import competition. The results indicate that cross sectional estimates of the concentration-margins relationship are likely to be both biased and misleading.

Conditional variance and the risk premium in the foreign exchange market

Abstract We investigate the existence of a risk premium in the foreign exchange market, based on the conditional variance of market forecast errors. The forecast errors are assumed to follow the ARCH process introduced by Engle (1982) . Estimation and diagnostic testing of the model are discussed, and results are presented for the currencies of the United Kingdom, France, Germany, Japan and Switzerland.

International Cross-listing and Order Flow Migration: Evidence from an Emerging Market

Policymakers in emerging markets are increasingly concerned about the consequences for the domestic equity market when companies list stock abroad. We show that the effects of cross-listing depend on the quality of intermarket information linkages. We investigate these issues with unique data from the Mexican equity market. The impact of cross-listing is complex-balancing the costs of order flow migration against the benefits of increased intermarket competition. These effects are exacerbated by equity investment barriers that induce segmentation of the domestic equity market. Consequently, the benefits and costs of cross-listing are not evenly spread over all classes of shareholders. Copyright The American Finance Association 1998.

Liquidity, Volatility, and Equity Trading Costs Across Countries and Over Time

Actual investment performance reflects the underlying strategy of the portfolio manager and the execution costs incurred in realizing those objectives. Execution costs, especially in illiquid markets, can dramatically reduce the notional return to an investment strategy. This paper examines the interactions between cost, liquidity and volatility, and analyses their determinants using panel data for 42 countries from September 1996 to December 1998. We document wide variation in trading costs across countries; emerging markets, in particular, have significantly higher trading costs even after correcting for factors such as market capitalization and volatility. We analyse the inter-relationships between turnover, equity trading costs and volatility, and investigate the impact of these variables on equity returns. In particular, we show that increased volatility, acting through costs, reduces a portfolios expected return. However, higher volatility reduces turnover also, mitigating the actual impact of higher costs on returns. Further, turnover is inversely related to trading costs, providing a possible explanation for the increase in turnover in recent years. The results demonstrate that the composition of global efficient portfolios can change dramatically when cost and turnover are taken into account. Copyright 2001 by Blackwell Publishers Ltd.

Market Structure and Cyclical Fluctuations in U.S. Manufacturing

The relevance of imperfect competition for models of aggregate economic fluctuations has received increased attention from researchers in both macroeconomics and industrial organization. Measuring properly the size of industry markups of price over marginal cost is important both for assessing the role of market structure and for determining the extent to which excess capacity is a significant feature accompanying imperfect competition in American industry. Using a panel data set on four-digit Census manufacturing industries, this paper expands recent work by Robert Hall on the importance of market structure for understanding cyclical fluctuations. We outline a methodology for estimating industry markups of price over cost and the influence of market structure on cyclical movements in total factor productivity. While we find evidence to support the proposition that price exceeds marginal cost in U.S. manufacturing, our results offer only limited support for the notion that markups are importantly related to differences in industry concentration, though the effect of unionization is important. Concentration effects are important only in industries producing durable goods or differentiated consumer goods. In addition, much of the estimated markup of price over marginal cost is accounted for by fixed costs related to overhead labor, advertising, and central office expenses; we do not find compelling evidence of substantial evidence of excess capacity in most industries.

A Taxonomy of Automated Trade Execution Systems

A taxonomy of existing and planned automated trade execution systems in financial markets is provided. Over 50 automated market structures in 16 countries are analyzed. The classification scheme is organized around the principle that such markets consist of an algorithm that performs a trade matching function, together with information display and transmission mechanisms. Automated market structures are classified by ordered sets of trade execution priority rules, trade matching protocols and associated degree of automation of price discovery, and transparency, to include informational asymmetries between classes of market participants. Systematic differences in systems across types of financial instruments, geographical market centers, and over time are analyzed.

Auctions as algorithms: Computerized trade execution and price discovery

Abstract Computerized auction systems are introduced as a new form of market institution, characterized by communications technologies for passing messages between traders and a set of programmed rules that restrict the message space and process messages into transactions prices and quantities. The stationary distributions of price quotations and transactions prices, given order arrival rates conditioned on information available through the limit order book, are derived for an automated continuous auction system with price and time priority rules. The key to the analysis is the application of the theory of queues with preemptive priorities to the problem of two interactive queues. The model then is used to characterize the structure of the electronic order book in terms of the distributions of the number of buy and sell orders in the system and the waiting time to trade execution. The theoretical development is applied to a comparison of automated continuous and periodic single-price auctions, with respect to price volatility, the magnitude of the bid-ask spread, and volume traded per unit of time.

Oligopoly Supergames: Some Empirical Evidence on Prices and Margins

This paper is a panel data study on the behavior of prices and margins of oligopolies involved in repeated games. The authors examine two supergame models which generate very different predictions about the cyclical behavior of prices and margins. Evidence on the levels of price-cost margins indicates that oligopolies achieve equilibria that more closely resemble a one-shot Cournot-Nash outcome than monopoly. The authors find, however, that industries with high price-cost margins exhibit cyclical price behavior which is quite different from that of unconcentrated industries. Little evidence of price wars during either recessions or booms is found. Copyright 1987 by Blackwell Publishing Ltd.

The Intertemporal Stability of the Concentration-Margins Relationship

Using a longitudinal data base, we find that there has been a substantial narrowing of the spread between the price-cost margins of concentrated and unconcentrated industries. Including measures of macroeconomic fluctuations into standard price-cost margin regressions, we find significant differences in cyclical behavior across market structure. We also explore a possible explanation, unionization, for differences in cyclical behavior. Finally, we investigate the degree to which our results are affected by the potential simultaneity of concentration, advertising, and the price-cost margin.

An error-correction approach to money demand : The case of Sudan

Abstract An empirical analysis of money demand behavior in Sudan is presented, based on the dynamic error-correction model. A theoretical basis for the model is offered, which allows an explicit, parameterized division of effects into long-run influences, short-term adjustments, and proportional equilibrium conditions. We refute previous claims that income and price effects may be abnormally high in Sudan, in part by accounting for both foreign exchange and inflationary influences.