Competition and International Equity Returns: Some Empirical Tests of â€œTurbulent Arbitrageâ€
AbstractThe idea that capital flows accelerate and decelerate in response to differential rates of return on real investment is common to virtually all of economic theory. This paper examines the nature of this process, especially the relationship between returns in the stock market and returns on real investment. Shaikh (1998) makes the case that the rate of return on new physical (real) investment is the â€œrequiredâ€ rate of return for the stock market and that competitive forces produce a rough equalization between these two rates of return, what he terms â€œturbulent arbitrage.â€ In contrast to neoclassical theories of perfect competition, with its notions of perfect information and convergence to a uniform rate of return, the notion of â€œturbulent arbitrageâ€ is a dynamic process that requires a tendency toward convergence as well as the constant differentiation of profit rates (Botwinick 1993). Data on rates of return at the country, industry, and firm level for Japan, Germany, the United Kingdom, and the United States are analyzed and correlated with Shaikhâ€™s â€œincremental rate of return on real investmentâ€ which, it is argued, is the target of the equalization process. Statistical and econometric tests based on time series methods and pooling techniques support the hypothesis that the rate of return on equity prices is linked to the incremental return on real investment. In addition, this association is examined for two industriesâ€”steel and retail tradeâ€”across these same four countries. Global and domestic equity markets are found to be significantly correlated with the incremental returns for the steel industry but not for the retail trade sector. JEL classification: G15, F02, C33
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Bibliographic InfoArticle provided by Union for Radical Political Economics in its journal Review of Radical Political Economics.
Volume (Year): 42 (2010)
Issue (Month): 1 (March)
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classical competition; international equity returns; incremental rate of return on real investment;
Find related papers by JEL classification:
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
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