Do Markup Dynamics Reflect Fundamentals or Changes in Conduct?
31 Pages Posted: 9 Apr 2015
Date Written: April 9, 2015
Intertemporal shifts in conduct, such as a transition from competitive to anticompetitive behavior, induce shifts in the firms’ equilibrium price configurations. Such shifts generate non-stationary price dynamics in addition to those which originate from exogenous fundamentals. We exploit this statistical feature to detect potential changes in conduct, as well as measure their effect on prices. Our approach requires only data on prices and fundamentals without necessitating strong assumptions regarding industry structure. Application to United States and European banking sectors indicates substantial differences between conventional credit spreads and components associated with changes in conduct.
Keywords: Regime shifts, Conduct, Cointegrated VAR, Smooth transitionarated
JEL Classification: G21, L13, L16, L40
Suggested Citation: Suggested Citation