Dynamic Competition and Expected Returns

56 Pages Posted: 5 Dec 2019

See all articles by Ilona Babenko

Ilona Babenko

Arizona State University

Oliver Boguth

Arizona State University (ASU) - Finance Department

Yuri Tserlukevich

Arizona State University (ASU)

Date Written: November 18, 2019

Abstract

We build a dynamic model that highlights two separate effects of product market competition on factor betas. Within an industry, competition increases dynamically with the underlying demand and is responsible for an inverse U-shaped relation between systematic risk and profitability. Conditional on profitability, industries with lower adjustment costs are more competitive and less risky. Our empirical approach exploits changes in oil prices to capture the dynamic effect in the oil sector and uses a measure of trade flows between economic sectors to capture the cross-industry effect. Our methodology improves on previous studies that use one-dimensional proxies such as industry concentration to measure competition.

Keywords: competition, investment, betas, priced risk, returns

Suggested Citation

Babenko, Ilona and Boguth, Oliver and Tserlukevich, Yuri, Dynamic Competition and Expected Returns (November 18, 2019). Available at SSRN: https://ssrn.com/abstract=3490319 or http://dx.doi.org/10.2139/ssrn.3490319

Ilona Babenko

Arizona State University ( email )

Department of Finance
W.P. Carey School of Business
Tempe, AZ 85287
United States

Oliver Boguth

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Yuri Tserlukevich (Contact Author)

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

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