IDEAS home Printed from https://ideas.repec.org/a/sae/reorpe/v42y2010i1p5-31.html
   My bibliography  Save this article

Competition and International Equity Returns: Some Empirical Tests of “Turbulent Arbitrageâ€

Author

Listed:
  • John Sarich

    (New York City Department of Finance, New York, USA)

  • Jason Hecht

    (Ramapo College of New Jersey, Mahwah, USA, jhecht@ramapo.edu)

Abstract

The 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 “required†rate of return for the stock market and that competitive forces produce a rough equalization between these two rates of return, what he terms “turbulent arbitrage.†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 “turbulent arbitrage†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 Shaikh’s “incremental rate of return on real investment†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 industries—steel and retail trade—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

Suggested Citation

  • John Sarich & Jason Hecht, 2010. "Competition and International Equity Returns: Some Empirical Tests of “Turbulent Arbitrageâ€," Review of Radical Political Economics, Union for Radical Political Economics, vol. 42(1), pages 5-31, March.
  • Handle: RePEc:sae:reorpe:v:42:y:2010:i:1:p:5-31
    as

    Download full text from publisher

    File URL: http://rrp.sagepub.com/content/42/1/5.abstract
    Download Restriction: no

    More about this item

    Keywords

    classical competition; international equity returns; incremental rate of return on real investment;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:reorpe:v:42:y:2010:i:1:p:5-31. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (SAGE Publications). General contact details of provider: http://www.urpe.org/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.