Research articles for the 2019-11-30

Addressing Competition Challenges in Financial Markets
Pike, Chris,Aragon Plaza, Rosana
Advocating for competition in financial markets can be more challenging than in other markets since other policy goals can take precedence over efficiency considerations. Competition authorities therefore have to cooperate effectively with financial regulators and powerful central banks if they are to use market studies or their other tools to advocate for policy solutions that take into account efficiency concerns in addition to other government objectives such as market stability and consumer protection. Financial markets can also be different (and difficult) because the framework for merger review in financial markets often differs from other markets, meaning that the competition authorities̢۪ role can be limited or less decisive. Furthermore, while competition authorities typically retain their role in enforcement against anticompetitive conduct in financial markets, they nevertheless need to cooperate effectively with financial regulators and central banks in order to take advantages of the opportunities that exist in these investigations. This issues paper looks at the ways in which agencies in Latin America and the Caribbean can ensure they cooperate effectively.Effective cooperation is particularly important when conducting market studies, both because of the expertise that the financial regulator and central bank can bring to the study, and because the way in which the market is regulated may be a relevant feature of the market that is found to have an impact on competition. In addition, effective cooperation that increases the quality of the market study can help to build the credibility of the study, which in turn increases the likelihood of recommendations being acted on. We therefore look at the experiences that competition authorities in Latin America and the Caribbean have had in conducting market studies in the financial sector.

Do Financial Crises increase Income Inequality?
Bodea, Cristina,Houle, Christian,Kim, Hyunwoo
This paper investigates the impact of economic crises on income inequality. Important evidence has emerged that in the aftermath of crises politics becomes polarized and economists have linked this to greater differences in income due to crises. The evidence however on whether crises can be linked to divergent incomes is weak and plagued by i) the possibility of a reverse effect going from great disparity in incomes to major economic crises; ii) the persistent nature of income inequality; and iii) important measurement error in both the dependent and independent variables. We use the longest time stretch of available data on crises and types of crises (Reinhart and Rogoff 2011) and income inequality (Solt 2009), as well as General Method of Moments and Error Correction Models to more credibly tackle the complex theoretical and empirical relationship between crises and inequality. We find strong evidence that currency, banking, inflation and debt crises increase inequality, particularly in the long run.

Retail Trading and Momentum Profitability
Chung, Ling Tak Douglas
Monthly momentum returns increase monotonically from low to high levels of retail trading with a spread of 1.42% (t-statistics = 3.46). Stocks that are heavily traded by retail investors exhibit lottery-like features such as low prices, high idiosyncratic volatilities/skewness, and high past maximum returns. Using lottery characteristics to proxy for the extent of retail trading, future momentum profits monotonically increase in the cross-sectional lotteryness of stocks over a 77-year back-testing period for which retail trading data is unavailable. Further analysis shows that lottery-like stocks exhibit stronger comovements that amplify momentum profits.