International Journal of Banking, Accounting and Finance (12 papers in press)
Risk, competition and cost efficiency in the Chinese banking industry
by Yong Tan, Christos Floros
Abstract: Using a sample of Chinese commercial banks over the period 2003-2013, this paper tests the interrelationships between credit risk, competition and cost efficiency in the Chinese banking industry under a three-stage least square estimator. The findings suggest that a higher level of competition leads to higher credit risk of Chinese commercial banks and a higher level of efficiency leads to lower credit risk. In addition, it is found that higher level of efficiency results in higher level of competition in the Chinese banking industry and higher levels of credit risk precede an increase in the level of competition. Finally, the results show that Chinese commercial banks with higher levels of credit risk have lower levels of cost efficiency and competition-efficiency hypothesis holds in the Chinese banking industry. The results provide policy implications to the Chinese government and banking regulatory authorities.
Keywords: credit risk; competition; cost efficiency; Chinese banking; three-stage least square.
Time Varying Volatility and Asymmetric News Effect during Financial Crises Evidence from DJIA, S&P 500, NASDAQ and FTSE 100 Indices
by SAMER AL-RJOUB, Husam Azzam
Abstract: We look at historical episodes in the United States over the last one hundred years of major stock market crashes in the Dow Jones industrial average, the S&P 500 and the NASDAQ indices to examine the effect of financial crises on stock returns and the news effect. Our Main results are:
I) Crises affect stock market returns negatively.
II) The monotonic relationship between risk and return is more obvious during crises than without crises.
III) Volatility of stock returns is high during crises
IV) The asymmetric news effect (leverage effect) is negative and statistically different from zero for the three indices in all scenarios.
V) The asymmetric news effect is more obvious for the weekly stocks returns
Based on these results, we believe that people's reaction is homogenous and recurs. Psychological factors affect invertors behavior during crises where panic magnifies the effect of crises and is reflected in the form of increased volatility and overreaction to bad news. In addition we replicate the same tests on the FTSE 100 of UK and results coincide.
Keywords: Crises; Volatility; News Effect; Psychological Factors.
Leverage and investment: A view of prominent role of state ownership
by Duc Nam Phung, Thi Phuong Thao Hoang
Abstract: The study investigates the relationship between leverage and investment in the presence of state ownership in an emerging market. The paper finds that leverage is negatively correlated to corporate investment. This negative relationship is different among firms with different growth opportunities in which the negative relation is significantly larger for low growth companies than high growth ones. Furthermore, when the role of state ownership at both bank and firm levels is taken into account, we find that state ownership tends to attenuate the negative relationship between leverage and investment. The results imply a biased and less-constrained lending policy of a banking system wherein state-owned banks dominate. This bias, in turn, causes over-and-inefficient investments in state-owned firms.
Keywords: Corporate Governance; Leverage; Investment; State Ownership.
Stock Market Predictability 2000-2014: the effect of the Great Recession
by Nektarios Michail
Abstract: The return predictability of 242 companies with continuous daily trading in the Standard and Poors index during the 2000-2014 period is examined using rolling variance ratio tests. The results indicate that predictability is time-varying and stock-specific, a finding which is in accordance to the Adaptive Market Hypothesis. During the Great Recession the number of stocks whose returns were found to be predictable increased substantially, especially during the period of Lehman Brothers bankruptcy. Importantly, predictability is found to be driven by changing market conditions, such as stock market volatility and economic fundamentals.
Keywords: stock market predictability; adaptive markets; Great Recession; mean reversion.
Securitization, Loan Specialization and Bank Risk
by Kenneth A. Tah
Abstract: This study examines the effect of securitization on the loan portfolio, investigating its impact on bank loan specialization. Using U.S. bank holding company data from 2001: Q2 to 2014: Q1, I find a positive relation between securitization and bank loan specialization, driven primarily by securitized mortgages. This study in addition examines securitizations effect on the negative relationship (as observed in previous studies) between loan specialization and bank risk, finding that within the period of our studies, securitization weakens that relationship. Such results suggest that within the focus period of this study, mortgage backed securitization in particular resulted in an overall specialization of credit, in ways that weakens the risk benefit associated with loan specialization.
Keywords: Securitization; loan specialization; bank risk; bank holding company; mortgage backed securitization.
Basel 3.5 vs Basel III A radical overhaul of the Capital Requirements Pillar The case of commodity exposures
by Adrian Rossignolo
Abstract: Following the implementation of Basel III, the Basel Committee has embarked on a thorough review of its market risk directives and enacted new proposals generically called Basel 3.5. They involve a radical transformation of the Standardised Approach (SA) into a risk-sensitive method and a complete overhaul of the Internal Models Approach (IMA) through the replacement of VaR for ES, amid stringent validation standards. rnThe study analyses Basels recent regulations for commodities exposures, finding a substantial rise in capital levels for SA and IMA and the relatively disadvantageous position in which IMA is placed, arising from the higher SAs capital requirements and the tougher evaluation criteria only attained by schemes featuring Extremes Theory. This, in turn, provokes accuracy disincentives and unnecessary immobilisation of funds.rnConsequently, the paper introduces a straightforward solution designed to level SA and IMA and provide substantial protection against huge market slumps with more reasonable capital levels and reduced implied costs.rn
Keywords: Basel 3.5; Basel III; Standardised Approach; Internal Models Approach; Expected Shortfall; Extreme Value Theory.
Pricing Partial-Average Asian Options with the Binomial Method
by Erwinna Chendra, Kuntjoro Adji Sidarto, Muhammad Syamsuddin, Dila Puspita
Abstract: An Asian option is path-dependent derivatives whose payoff depends on the average of the underlying asset price over a certain pre-specified period of time. There is no simple closed-form solution for an arithmetic Asian option hence the development of efficient and accurate numerical methods has become critical. In this paper, a modified binomial method is presented for pricing a more common arithmetic Asian option, by averaging the asset between two time periods in the life span of the option. This option is called the partial-average Asian option. Subsequently the representative averages are used instead of the actual ones for pricing the option. The set of representative averages is constructed first by determining the maximum and the minimum averages, where other averages are calculated by dividing equally the distance between the maximum and the minimum averages. For Asian option with average strike, if the distance between two time periods is widened by shifting the second time period to the right then the price becomes lower. But if the distance is widened by shifting the first time period to the left then the price becomes higher. The algorithm is not only simple but also easy to implement.
Keywords: Asian option; partial-average; binomial method.
Cash flow sensitivities and bank-finance shocks in nonlisted firms
by Charlotte Ostergaard, Amir Sasson, Bent E. Sørensen
Abstract: We study how small firms manage cash flows by estimating cash flow sensitivities for all sources and uses of cash. Our data are Norwegian nonlisted firms which can be matched to the banks they borrow from. Firms with low cash holdings mainly use external finance to offset cash flow fluctuations over the cycle, whereas firms with high cash holdings rely mainly on internal finance. Estimating how cash flow sensitivities change with exogenous bank shocks, we find that the cyclicality of cash-poor firms' investment is amplified because they do not substitute internal for external finance. Our results imply that for small firms, the transmission of financial shocks to the real economy is closely tied to their accumulation of cash.
Keywords: Cash Holdings; Cash Management; SMEs; Cash Flow Sensitivity; Bank Lending Channel.
The Earnings Announcements Consequences in Public Family Firms
by Elisabete Simões Vieira
Abstract: This paper investigates the market reaction to earnings announcements in public family firms, seeing whether these announcements affect firms return, liquidity and cost of capital. We analyse a sample of Portuguese listed firms for the period 2000-2013, using the event study and a panel data approach. Overall, we find no support for the earnings signalling and the efficient market hypotheses. We find no significant differences between family and non-family firms in what concerns performance. Firms size and age contribute positively to the firms performance. Finally, we find no significant relationship between earnings changes and firms liquidity and weighted average cost of capital, giving no support for the pecking order theory. This study is of interest to scholars and practitioners in the finance field, namely the information content of earnings and the differences between listed family and non-family firms in what concerns the earnings announcements effects.
Keywords: earnings announcements; return; liquidity; cost of capital; family firms.
Actively versus Passively Managed Equity ETFs: New Empirical Insights
by GERASIMOS ROMPOTIS
Abstract: This study employs a sample of 37 active and passive ETF pairs investing in common equity stocks to assess their performance and risk up to December 31, 2016. Several return metrics are computed such as absolute, buy-and-hold returns and risk-adjusted returns. Moreover, cross-sectional regression analysis is applied trying to identify the factors that may influence the performance of ETFs. Finally, the ability of managers to time the market is examined. The findings are similar to those in the previous literature. Active ETFs fall short in terms of performance and overall risk when compared their passive counterparts also failing to deliver any material excess-market return. In addition, active ETF managers are lacking in superior market timing skills. Finally, the performance of ETFs is found to be related with expenses and volume in a negative fashion while a positive relationship is revealed between performance and the assets invested in ETFs.
Keywords: ETFs; Active Management; Performance; Market Timing; Expenses.
Special Issue on: 2016 Portsmouth – Fordham conference on Banking and Finance Recent developments in Global Financial Markets
The WTI/Brent oil futures price differential and the globalisation-regionalisation hypothesis
by MICHAIL FILIPPIDIS, Renatas Kizys, George Filis, Christos Floros
Abstract: This study examines the globalisation-regionalisation hypothesis in the WTI/Brent crude oil futures price differential by considering a set of the potential determinants at 1, 3 and 6 months to maturity contracts. To this end, we employ monthly data over the period 1994:1-2014:12 for a set of crude oil market specific (convenience yield, consumption, production) and oil futures market specific (open interest, trading volume) determinants. Consistently with the regionalisation hypothesis, our results are as follows. First, the WTI/Brent convenience yield spread can drive a wedge between the WTI and Brent oil futures prices for the 1-month and 3-month contracts. Second, the WTI/Brent oil production spread is a significant determinant for the nearby month to maturity contract, while the WTI/Brent oil consumption spread is significant for the 6-month contract. Third, the WTI/Brent open interest spread appears to influence the oil futures price variability between the WTI and Brent for the 1-month and 3-month contracts, while the WTI/Brent trading volume spread lends predictive power for the 3-month contract. Fourth, our robustness analysis lends support to the above findings. The findings of this study provide valuable information to energy investors, traders and hedgers.
Keywords: Brent; convenience yield; globalisation-regionalisation hypothesis; oil futures differential; WTI.
Reaction of EU stock markets to ECB policy interventions
by Dimitrios Vortelinos, Konstantinos Gkillas (Gillas)
Abstract: This paper investigates the significance and impact of ECB policy
interventions on European stock markets. We conducted an event
study and a regression analysis. Our data is drawn from the stock indices of the
countries of all 28 members of the European Union (Euro
members and non-Euro members). Our dataset begins on 1 January 2001 and
ends on 31 December 2014, for a total of 3,906 trading days. During
the sample period, 394 policy interventions are considered as significant
dates. Our results provide strong evidence in favour of a positive and
statistically significant reaction to most of the ECB's policy interventions.
The most important category of events is the financial sector
Keywords: abnormal returns; policy interventions; event study; financial crisis.