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We explore the empirical prowess of H statistic method and its power in exhibiting
Oligopolistic/monopolistic pricing in small panels with missing observations by studying the
Post crisis evolution of the banking industry over the period of 7 years. This is a toy
example, meant for academic writing, and with no implicit or expressed warranty. It is
strongly suggested to read the original literature, and this paper strongly before jumping to
conclusions.
Contents
1. INTRODUCTION ..................................................................................................... 1
2. Theoretical aspects ..................................................................................................... 1
Table 1: Herfindahl- Hirshman Index computed for the relevant period. ................ 2
Table 2: Post Vs. Pre: Comparison with British Bankers association data up to
2002............................................................................................................................ 2
A brief overview of the Rose Panzar Statistic:........................................................... 3
3. Data and Methods ...................................................................................................... 4
Table 3a. Interpreting the Panzar-Rose H-statistic ................................................... 4
Table 3b. Interpreting the Panzar-Rose H-statistic (contd.) ..................................... 5
4. RESULTS .................................................................................................................. 5
Equation for Competitive Equilibrium (Results of regression eqn. 1)....................... 5
Equation for Equilibrium (Results of regression eqn. 2) ........................................... 7
5. Conclusion and Further Ideas .................................................................................... 8
Code for Computing the HerfindahlHirschman Indices: ......................................... 9
Code for computing Competitive Equilibrium .......................................................... 9
Bibliography .................................................................................................................. 9
1. INTRODUCTION
Competition in the Banking sector has far reaching consequences over other sectors,
whose survival is crucial on loans. It is easy to see in case of variance on returns, and
low covariance among firms, competing for sector, a monopoly in business financing
leads to monopolistic pricing in various sectors, eg. Telecom Industry Auctions
How (Not) to Run Auctions:the European 3G Telecom Auctions2002.
As a consequence the evolution of competitive structure in the retail banking sector
gains more substance, although it is interesting to motivate the study in its own merit,
considering interest rates as prices. To do the analysis, following Competitive
conditions among the major British banks2007, RossePanzar methodology is
explored on both Gross Earnings and Core Earnings of aggregated Bank Data in UK.
Finally we also compare results from the classical concentration ratio approach:
HerfindahlHirschman Indices.
Another reason to carry out this study is to evaluate the post-crisis evolution of the
banking sector since 2007.
2. Theoretical aspects
The U.S. Department of Justice considers a market with a Herfindahl Hirshman
Indices of less than 1,000 to be a competitive marketplace; a result of 1,000-1,800 to
be a moderately concentrated marketplace; and a result of 1,800 or greater to be a
highly concentrated marketplace. The Table below shows the Herfindahl-Hirshman
Indices computed for each year.
1
Herfindahl
Hirschman
Indices
2191
2172
2121
2077
2049
2064
2042
Table 2: Post Vs. Pre: Comparison with British Bankers association data up to
2002
Year/measure
1986
1991
1996
2002
HHI
1428.470
1423.817
1051.831
1249.696
In the UK, it is widely believed that the Banking crisis had similar effects that the
collapse of Lehman Brothers had on the US banking sector. Faced with negative
market assessments and a crisis of confidence among peer institutions, many banks
2
depend strongly on central bank funding. Amidst major financial restructuring of the
retail banking industry, new empirical industrial organization which assesses
deviations between observed and marginal cost pricing, without explicitly using any
market structure indictor, but includes a Bank Specific variable becomes imperative.
We thus motivate our study with two aspects, higher conventional indices, as a result
of crisis (The fact that some bigger institutions survived, simply because they were
too big to fail), and decreasing equity value of banking institution, staggering
revenue and low Revenue Growth.
--------- (1)
Subscript i denotes ith Bank and t denotes year, in accordance with standard Panel
symbols. denotes the unobservable bank-specific fixed effect and denotes IID
random error, tested on Gaussian assumptions. It is not required to break the timesample for test of distinct trends, or for structural breaks, as done in Competitive
conditions among the major British banks2007 which underlie methods in
addressing the problem of simultaneity between real GDP and Growth term, mainly
because the conditions of post recovery is quite rigid, and real GDP (not nominal gdp)
would be hardly affected in this case.
The statistic of interest is the H statistic:
H 0
0 H 1
H 1
Where denotes the bank specific individual effect. Again equilibrium H is:
----------(2)
- Equilibrium
H 0 (truncated)
- Disequilibrium
It is summative that if the sample is not in the long-run equilibrium, H<0 in the first
regression no longer establishes monopolistic market conditions, but remains true that
H>0 disproves monopoly or conjectural variation short-run oligopoly.
4. RESULTS
Equation for Competitive Equilibrium (Results of regression eqn. 1)
Dependent Variable: @LOG(REV)
Method: Panel Least Squares
Date: 01/02/15 Time: 22:08
Sample: 2007 2013
Periods included: 7
Cross-sections included: 11
Total panel (unbalanced) observations: 65
Variable
C
3.732273
@LOG(PK)
0.201472
@LOG(PF)
-0.176428
@LOG(PL)
0.008421
@LOG(RISKASS)
0.096573
@LOG(TOTAL_ASSETS
)
-0.475124
GROWTH
0.021890
t-Statistic
Prob.
3.122028
0.098942
0.064196
0.116216
0.063172
1.195464
2.036251
-2.748276
0.072462
1.528736
0.2378
0.0473
0.0084
0.9425
0.1329
0.158060
0.017672
-3.005982
1.238688
0.0042
0.2215
Effects Specification
Cross-section fixed (dummy variables)
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.806541
0.742055
0.253028
3.073101
6.949255
12.50720
0.000000
-4.820703
0.498201
0.309254
0.877940
0.533637
1.547120
Wald Test:
Equation: Untitled
Test Statistic
Value
df
Probability
t-statistic
F-statistic
Chi-square
2.780360
7.730403
7.730403
48
(1, 48)
1
0.0077
0.0077
0.0054
Normalized Restriction (= 0)
Value
Std. Err.
3.765738
1.354406
We can do a one tailed truncated F- test, manually as Eviews does not do a one tailed
test.
P(H>0)= 0.007733
We reject the Hypothesis that H>0 (and therefore H>1) finding strong evidence
in favour of Monopoly.
9
8
7
6
5
4
3
Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis
-1.71e-18
-0.021305
0.568280
-0.568280
0.219128
0.239797
3.328333
Jarque-Bera
Probability
0.914910
0.632892
2
1
0
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
We are unable to reject normality (by Jacque Bera Probability), which means we are
correct in our estimates. Adding a lagged growth term reduces the adjusted R squared,
and the residual fitted plot below does not show any distinct trend in error terms or
trend in volatility.
3
-1
-2
-3
Standardized Residuals
While our model seems correctly specified tests for the H statistic is inconclusive, we
fail to reject the direction of H both ways.
Coefficient
Std. Error
t-Statistic
Prob.
@Log(C)
@Log(PF)
@log(PL)
@log(PK)
1.012886
-1.001433
-4.64E-06
-0.000305
0.000872
0.046774
1.41E-06
0.000127
1161.358
-21.40988
-3.282890
-2.405223
0.0000
0.0000
0.0019
0.0200
RISKASS
TOTAL_ASSETS
GROWTH
-0.045588
-4.92E-12
0.000181
0.146057
7.96E-13
0.000135
-0.312128
-6.185780
1.342578
0.7563
0.0000
0.1856
Effects Specification
Cross-section fixed (dummy variables)
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.980416
0.974021
0.002239
0.000246
318.8923
153.3130
0.000000
0.990996
0.013891
-9.148250
-8.584248
-8.925386
1.535601
Wald Test:
Equation: Untitled
Test Statistic
Value
df
t-statistic
0.240987
49
F-statistic
Chi-square
0.058075
0.058075
(1, 49)
1
Probability
0.966307
0.966307
0.9596
Value
Std. Err.
0.011144
0.046242
H0: H=0
HA: H<=0
Since F-statistic =0.966307
> .05, we fail to reject the null hypothesis, that H=0
In fact we can see at .05 and more significance levels, we can reject that H<=0
Appendix A
Disclaimer:
1. Eviews 8.1 has been used. The author is not affiliated to Eviews, nor is it asserted
that he is doing the best use of the same, nor is he endorsing/ reccomending its use.
Eviews is a registered trademark of IHS Global Inc., 15 Inverness Way East,
Englewood, CO 80112, USA.
2. In the following code, Proxies and Data imputation has been toyed into. In real
world an array of data resources like Bloomberg could be used to intraplate this kind
of data using Classification methods. Although the bite is not strong, user discretion is
advised.
Bibliography
Competitive conditions among the major British banks MatthewsKent,
MurindeVictor, ZhaoTianshu2007Journal of Banking & FinanceVol. 31
pp.20252042
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