Invisible Market Forces with Observable Effects

44 Pages Posted: 11 Mar 2020 Last revised: 4 Feb 2023

See all articles by Pantelis Karapanagiotis

Pantelis Karapanagiotis

EBS Business School; Leibniz Institute for Financial Research SAFE

Date Written: October 29, 2020

Abstract

The limited availability of methodologies that evaluate departures from market-clearing discourages the application of estimation methods that allow them. Nevertheless, shortages and surpluses appear in a plethora of markets not only under exceptional but also under normal circumstances. In this article, I propose a statistical assessment of the market-clearing condition, which allows the comparison of equilibrium and disequilibrium models for which the likelihoods are known. An application of the methodology using US retail and scanner deodorant data provides evidence that, during times of distress, exogenous shocks can strengthen the price mechanism of markets that are not characterized by some innate failure. In prosperous times, market participants may become more complacent and, as a result, the price mechanism can be weakened. Analytic expressions, simulations, and computational benchmarks for five market models are also presented. The results of this article may serve in empirical justifications of deviations from market-clearing.

Keywords: market-clearing, disequilibrium, marginal effects, model selection, maximum likelihood, Markov switching

JEL Classification: C01, C18, C34, C52, D50, D45

Suggested Citation

Karapanagiotis, Pantelis, Invisible Market Forces with Observable Effects (October 29, 2020). Available at SSRN: https://ssrn.com/abstract=3525622 or http://dx.doi.org/10.2139/ssrn.3525622

Pantelis Karapanagiotis (Contact Author)

EBS Business School ( email )

Gustav-Stresemann-Ring 3
65189 Wiesbaden, Hessen
Germany

Leibniz Institute for Financial Research SAFE ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt, 60323
Germany

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