Projects

Price Volatility

Price Volatility, Inventory and Industry Consolidation

Research Theme: Globalization

Project Objective Statement: study price volatility, the impact of inventory on price changes, and the effect of industry consolidation on price volatility and profitability, and vertical integration decision.

Project summary:

The proposed project extends the previous price project in four important and closely related dimensions. The first dimension is to study price volatility. Price movement has shown an increasing volatility in the last decade. Understanding price volatility can help improving price forecasting by incorporating the volatility dynamics in the forecasting models; and it can help the industry move beyond the traditional business model by employing modern financial instruments (e.g. forward markets) to better manage risks.

Second, since price volatility is directly associated with price changes, it is desirable to predict the probability of short-term price changes in order to smooth out the risk impact of price volatility. This part of the project will focus on constructing structural models to estimate the probabilities of price changes.

Given the potential risks associated with price volatility, knowing whether industry consolidation has stabilized or destabilized price movement is not only of academic interest but has significant general implications for industry structure in the years ahead and specific implications for firms' strategic decisions on mergers and acquisitions. The third objective of this project is to explore the effects of consolidation on price volatility as well as to evaluate its effects on costs and production efficiency.

Finally, the project analyzes the impact of increased transaction costs due to price volatility on vertical integration, specifically, whether price volatility increases firms' incentives to vertically integrate. Since vertical integration and forward markets are essentially hedges against the risk of price fluctuations, this project will provide insights on the relative efficiency of forward markets in reducing transaction costs caused by price volatility.

Contact:

Planned Duration: 20 months over 2004 and 2005; started in Spring 2004