Jumps in equilibrium prices and market microstructure noise

Asset prices observed in financial markets combine equilibrium prices and market microstructure noise. In this paper, we study how to tell apart large shifts in equilibrium prices from noise using high frequency data. We propose a new nonparametric test which allows us to asymptotically remove the noise from observable price data and to discover jumps in fundamental asset values. We provide its asymptotic distribution to decide when such jumps occur. In finite samples, our test offers reasonable power for distinguishing between noise and jumps. Empirical evidence indicates that it is necessary to incorporate the presence of jumps in equilibrium prices.     

House price convergence in euro zone and non-euro zone countries

This study investigates whether single currency use increased house price convergence among various countries. First, the panel unit root test results indicate that the house prices in euro zone countries were more correlated than the house prices in non-euro zone countries. Second, the house prices in various European countries converged towards the house prices in Germany, which uses the single currency, rather than towards those in the United Kingdom, indicating that single currency use increased the influence of the German housing market on other markets. Finally, the log t regression model, a new convergence test, was employed and determined that the house prices in various European countries were not converging before 1992 but began to do so after that year. After the euro was implemented as an official currency, the house prices in various countries converged towards a consistent level. On the basis of the relative transition paths, this study determines that the differences among housing markets in various countries have continuously decreased since 1992. The empirical results indicate that the law of one price is applicable to tradable goods and that single currency use can integrate housing markets, which include non-tradable goods.     

Random encounters and information diffusion about product quality

This paper explores how social interactions among consumers shape markets. In a two-country model, consumers meet and exchange information about the quality of the goods. As information spreads, demand evolves, affecting the prices and quantities manufactured by profit-maximizing firms. We show that market prices with informational frictions reach the duopoly price with full information at the limit. However, this convergence can take different paths depending on the size asymmetry between countries. In particular, when the country producing the low-quality good is relatively large, the single market does not immediately turn into a duopoly and can be temporarily trapped in a situation of price instability where no Nash equilibrium in pure (but only in mixed) strategies exists and prices can fluctuate between their monopoly and duopoly levels. It follows that the classical price-reducing effects of international trade may take longer to appear. In view of an intense globalization process, understanding how social meetings affect market outcomes is critical for understanding the performance of international economic integration.     

Spatial aspects of ticket scalping

We develop a simple insurance model of the secondary market for tickets to account for some of the observed spatial patterns of prices. Beyond ticket markets the model draws attention to the existence of subtle insurance fees in market prices that may be incorrectly attributed to breakdown of the law of one price or attributed solely to a cost‐based rationale. Copyright © 2010 John Wiley & Sons, Ltd.     

The behaviour of betting and currency markets on the night of the EU referendum

We study the behaviours of the Betfair betting market and the sterling/dollar exchange rate (futures price) during 24 June 2016, the night of the EU referendum. We investigate how the two markets responded to the announcement of the voting results by employing a Bayesian updating methodology to update prior opinion about the likelihood of the final outcome of the vote. We then relate the voting model to the real-time evolution of the market-determined prices as the results were announced. We find that, although both markets appear to be inefficient in absorbing the new information contained in the vote outcomes, the betting market seems less inefficient than the FX market. The different rates of convergence to the fundamental value between the two markets lead to highly profitable arbitrage opportunities.     

钢材期货价格发现功能研究——基于印度市场信息共享模型的分析

本文借助Johansen协整检验、Granger因果检验、信息共享模型、方差分解等方法进行多层次实证研究,定量地刻画出期货市场在价格发现中作用的大小。研究结果显示：印度板材期货价格和现货价格之间存在长期均衡关系,在价格引导上仅存在现货对期货价格的单向引导关系,期货对现货没有引导关系;通过方差分解发现,现货市场在价格发现功能中处于主导地位,说明印度钢材期货市场效率有待提高,板材期货没有实现其应有的价格发现功能。     

A graph theoretic approach to markets for indivisible goods

Many important markets, such as the labor market and the housing market, involve goods that are both indivisible and of budgetary significance. We introduce new graph theoretic objects ideally suited to analyzing such markets. We show that the minimum equilibrium price is characterized by a certain optimization problem on these graph theoretic objects.     

Cobweb dynamics and price dispersion in illicit drug markets

Extreme price dispersion is a hallmark of illegal drug markets, and this apparent contradiction to the law of one price has long puzzled drug market economists. We propose a novel explanation for this dispersion: the coupling of dealers’ unwillingness to hold inventory with dealers’ imperfect foresight concerning future prices and/or random lead times when “ordering” drugs from higher-level suppliers. Unwillingness to hold inventory means drug markets might operate consistent with a cobweb model. The classic cobweb model was inspired by the observation of cyclic (typically annual) fluctuations in commodity prices. However, with minor changes that make the model more realistic the resulting price trajectories can be highly variable or even chaotic, not just periodic. Cobweb dynamics can also amplify the variability created by supply chain disruptions.     

Housing market dynamics: Evidence of mean reversion and downward rigidity

House prices often exhibit serial correlation and mean reversion. Using two large panel datasets, this paper analyzes the price dynamics in two significantly different types of markets, cyclical (or volatile) and non-cyclical (or tame), by applying an autoregressive mean reversion (ARMR) model. Our results show that cyclical markets have larger AR coefficients than non-cyclical markets. As a result, house prices in cyclical markets tend to have larger price cycles. We also find that the upward periods have larger AR coefficients than the downward periods. This demonstrates that house prices are likely to overshoot the equilibrium in appreciating markets while experiencing downward rigidity during periods of decline. The model developed in this paper can produce a forecast with rich house price dynamics across markets. Our results can also be used to determine how house prices in overvalued markets will ultimately adjust.     

Price Discrimination in Two‐Sided Markets

We examine the profitability and welfare implications of targeted price discrimination (PD) in two‐sided markets. First, we show that equilibrium discriminatory prices exhibit novel features relative to discriminatory prices in one‐sided models and uniform prices in two‐sided models. Second, we compare the profitability of perfect PD, relative to uniform prices in a two‐sided market. The conventional wisdom from one‐sided horizontally differentiated markets is that PD hurts the firms and benefits consumers, prisoners' dilemma. We show that PD, in a two‐sided market, may actually soften the competition. Our results suggest that the conventional advice that PD is good for competition based on one‐sided markets may not carry over to two‐sided markets.     

An equilibrium model of insider trading in continuous time

We study a Bayesian–Nash equilibrium model of insider trading in continuous time. The supply of the risky asset is assumed to be stochastic. This supply can be interpreted as noise from nonrational traders (noise traders). A rational informed investor (the insider) has private information on the growth rate of the dividend flow rewarded by the risky asset. She is risk averse and maximizes her inter-temporal utility rate over an infinite time-horizon. The market is cleared by a risk neutral market maker who sets the price of the risky asset competitively as the conditional present value of future dividends, given the information supplied by the dividend history and the cumulative order flow. Due to the presence of noise traders, the market demand does not fully reveal the insider’s private information, which slowly becomes incorporated in prices. An interesting result of the paper is that a nonstandard linear filtering procedure gives an a priori form for the equilibrium strategy to be postulated. We show the existence of a stationary linear equilibrium where the insider acts strategically by taking advantage of the camouflage provided by the noise which affects the market maker’s estimates on private information. In this equilibrium, we find that the insider’s returns on the stock are uncorrelated over long periods of time. Finally, we show that the instantaneous variance of the price under asymmetric information lies between the instantaneous variance of the price under complete and incomplete information. The converse inequalities hold true for the unconditional variance of the price.     

China and international market integration: Evidence from the law of one price in the Middle East and Africa

We model market integration in the Middle East and Africa by analyzing price dispersion and testing the law of one price (LOP) on highly-comparable actual local retail prices of 135 goods and services across 23 countries in the region over the period of 1990–2016. Second-generation panel estimators are applied to four price benchmarks: Regional average, South Africa, China, and US prices. Cross-regional price dispersion diminishes considerably over time up to 2008, particularly for non-tradeables around China price. The test of LOP indicates the percentage of convergent prices is highest in China price benchmark, followed by US, South Africa, and regional average benchmarks. Direct estimation of the convergence speed confirms this order. Overall, the results show evidence of increasing market integration in Middle East and Africa but it appears to be driven by global forces and, especially, the rise of China as a new economic power. The results show that some emerging market economies, such as China, can step up and promote integration while traditional economic powerhouses, such as the USA and UK, disengage from international economic relations.     

Bargains Followed by Bargains: When Switching Costs Make Markets More Competitive

In markets where consumers have switching costs and firms cannot price‐discriminate, firms have two conflicting strategies. A firm can either offer a low price to attract new consumers and build future market share or a firm can offer a high price to exploit the partial lock‐in of their existing consumers. This paper develops a theory of competition when overlapping generations of consumers have switching costs and firms produce differentiated products. Competition takes place over an infinite horizon with any number of firms. This paper shows that the relationship between the level of switching costs, firms' discount rate, and the number of firms determines whether firms offer low or high prices. Similar to previous duopoly studies, switching costs are likely to facilitate lower (higher) equilibrium prices when switching costs are small (large) or when a firm's discount rate is large (small). Unlike previous studies, this paper demonstrates that the number of firms also determines whether switching costs are pro‐ or anticompetitive, and with a sufficiently large (small) number of firms switching costs are pro‐ (anti‐) competitive.     

When are prediction market prices most informative?

Prediction markets are a popular platform for the elicitation of incentivised crowd predictions. This paper examines the variation in the information contained in prediction market prices by studying Intrade prices on U.S. elections around the release of opinion polls. We find that poll releases stimulate an immediate uptick in trading activity. However, much of this activity involves relatively inexperienced traders, meaning that the price efficiency declines in the immediate aftermath of a poll release, and does not recover until more experienced traders enter the market in the following hours. More generally, this suggests that information releases do not necessarily improve prediction market forecasts, but instead may attract noise traders who temporarily reduce the price efficiency.     

Hassle Costs: The Achilles' Heel of Price-Matching Guarantees*

We show that price-matching guarantees can facilitate monopoly pricing only if firms automatically match prices. If consumers must instead request refunds (thereby incurring hassle costs), we find that any increase in equilibrium prices due to firms' price-matching policies will be small; often, no price increase can be supported. In symmetric markets price-matching guarantees cannot support any rise in prices, even if hassle costs are arbitrarily small In asymmetric markets, higher prices can be supported, but the prices fall well short of maximizing joint profits. Our model can explain why some firms adopt price-matching guarantees while others do not.     

List price and sales prices of residential properties during booms and busts

This paper investigates the relationship between the list and sale price of residential properties over the housing cycle. In down or normal markets the list price generally exceeds the sales price; however, when the housing market is strong, homes sell for more than their list price. This observation is not consistent with the assumptions made in the standard model of home sellers’ search behavior. We consider alternative models. In one, sellers set list prices based on their expectations of future changes in sales prices and the arrival rate of buyers; however, demand shocks occur. This model partially explains our data from the Belfast, U.K. housing market, but it fails to predict the list to sales price ratio during a sustained housing boom. We next describe a model where sellers’ endogenously select their search mechanism depending on the strength of the housing market. We find support for the conjecture that sellers switch to an auction-like model during housing booms. There also is evidence that during a downturn in the market, sellers’ list prices are sticky.     

Existence of an equilibrium for infinite horizon economies with and without complete information

This work proves the existence of an equilibrium for an infinite horizon economy where trade takes place sequentially over time. There exist two types of agents: the first correctly anticipates all future contingent endogenous variables with complete information as in Radner [Radner, R. (1972). Existence of equilibrium of plans, prices and price expectations in a sequence of markets. Econometrica, 289–303] and the second has exogenous expectations about the future environment as in Grandmont [Grandmont, J. M. (1977). Temporary general equilibrium theory. Econometrica, 535–572] and information based on the current and past aggregate variables including those which are private knowledge. Agents with exogenous expectations may have inconsistent optimal plans but have predictive beliefs in the context of Blackwell and Dubbins [Blackwell, D., Dubins, L. (1962). Merging of opinions with increasing information. The Annals of Mathematical Statistics, 882–886] with probability transition rules based on all observed variables. We provide examples of this framework applied to models of differential information and environments exhibiting results of market selection and convergence of an equilibrium. The existence result can be used to conclude that, by adding the continuity assumption on the probability transition rules, we obtain the existence of an equilibrium for some models of differential information and incomplete markets.     

Agricultural Prices in Transition Economies: The Case of Bulgaria and Slovenia1,2

The paper studies the extent to which the transition in agricultural prices has satisfactorily been implemented in Bulgaria and Slovenia and the degree to which actual prices reflect the equilibrium conditions of the market. In Bulgaria, a model in which the new and old regime can co-exist, was estimated using the Kalman filter while in Slovenia, a market clearing supply-demand model for each agricultural product is estimated. The quantitative results show that the liberalisation process in agricultural prices is implemented in Bulgaria in a satisfactory way. The way of price determination is shifting from a cost-based approach to a market clearing one. The conclusions for Slovenia suggest that, at least for the period studied, convergence to a market clearing economy, as measured by the state intervention, is not as rapid as desired.     

The role of the world’s major steel markets in price spillover networks: an analysis based on complex network motifs

In recent years, the international steel market has shown increasingly strong cross-regional correlation. To better understand the price trends of various markets, it is necessary to identify their inherent price spillovers. This paper combines a generalized autoregressive conditional heteroskedasticity Baba–Engle–Kraft–Kroner (GARCH-BEKK) model and complex network motifs to explore the price fluctuations among international steel markets. The study selects steel markets in 12 countries and regions and uses daily data on import and export prices from January 2009 to September 2017 to analyze eight steel products. The results show that spillovers are associated with geographical location, market development, product type and status. Spillovers mostly occur between buyer’s markets; additionally, the Asian market, especially the East Asian market, is in most cases the recipient of spillover, whereas the European Union (EU) market is in most cases the sender of spillover effects. Developed markets have clear spillover effects on emerging markets, sheet steel products have clear spillover effects on profile steel products, and the prices of midstream and downstream products in the industrial chain are the most influenced. This paper examines international steel market relationships from the perspective of price transmission, and the results can help manage and prevent large-scale economic risks.

     

The Risk Structure of Land Markets

Real property as an asset class represents over half of the wealth in the United States. Nevertheless, the structure of risk in real property markets is poorly understood. This paper develops a model of urban and agricultural land prices that integrates spatial and asset pricing theories and characterizes the spatial and temporal risk structure of the land market. Urban land is priced by a CAPM and agricultural land is priced by a real option to convert into urban land. We show that the price of land awaiting conversion increases with the growth rate of urban rents and unsystematic risk but decreases with risk aversion. However, it may be increasing or decreasing in systematic risk. The free boundary for exercise determines city size, which increases with the growth rate of urban rents but decreases with systematic and unsystematic risk.