EUROPEAN EQUITY MARKET DELINEATION: - A CRITICAL LOSS ANALYSIS USING PORTFOLIO OPTIMIZATION
Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
This thesis provides a numerical application of standardized market definition procedures used in competition law to delimit relevant markets in the effects assessments of anticipated mergers and acquisitions. Given the international integration of European financial markets and an unprecedented number of M&A after the implementation of the MiFID-directive, this study examines the interchangeability between main European indices for a representative investor. By assuming a small but non-transitory increase in price of trading the Swedish index OMXS30 by a hypothetical monopolist, the potential profitability is evaluated using a critical loss-test. The critical loss represents the magnitude of actual loss that just makes it unprofitable to impose a small price increase. Clearly, increasing trading fees affects the incremental costs of intermediary dealer-brokers, resulting in increasing commissions and ultimately affecting the investor’s perception of OMXS30 expected returns. The actual loss is estimated using portfolio optimization theory on a dataset of indices. By disturbing the expected returns for OMXS30 with a minor negative factor and note the change in portfolio weight, the negative change serves as a proxy for the hypothetical monopolist’s volume decrease. The simulation results show that a small but non-transitory increase in price of trading OMXS30 would be profitable. This implies low outside substitutability, indicating a separate relevant market for trading of Swedish equities.
Place, publisher, year, edition, pages
Competition, Market delination, Market microstructure, Relevant market, Financial regulation, Portfolio optimization, Portfolio theory, Crtitical loss, SSNIP-test, MiFID, Transaction costs
IdentifiersURN: urn:nbn:se:uu:diva-203615OAI: oai:DiVA.org:uu-203615DiVA: diva2:637084
Bask, Mikael, Lektor
Elinder, Mikael, Biträdande lektor