International Journal of Banking, Accounting and Finance (11 papers in press)
Dependence between Islamic banks and conventional banks and risk factors
by Chakroun Mohamed Amin, Gallali Mohamed Imen
Abstract: This study aims to identify the risk factors amplifying the contagion risk between the Islamic to conventional banks. Using the Copula approach and the panel VAR model, findings justifies the presence of a dependent relationship between the two types of banks, where the sense of causality of this phenomenon is unidirectional derived from conventional to Islamic banks. Hence, our results indicate that the market risk, the credit risk and the size of the financial institution represent the major factors triggering the contagion risk between both types of banks. To this extent, the Islamic banks should consider more restricted standards to be able to ensure their independence and to handle their contagion risk.
Keywords: Islamic finance; Contagion; systemic risk; Copula; MES; GJR-DCC; Panel VAR.
Accruals Quality and Analyst Forecast Accuracy: Evidence from the Property-Casualty Insurance Industry
by In Song
Abstract: This paper examines the association between property-casualty insurer accruals quality and analysts earnings forecasts (i.e., accuracy and dispersion of forecasts). Using insurer-specific accruals, loss reserves, we calculate accruals quality which can be decomposed into its innate and discretionary components. Our results provide evidence that higher accruals qualityas measured by low standard deviation of loss reserve errorsis positively associated with analysts forecast accuracy. In other words, our results suggest that analysts provide less accurate forecasts for firms with higher reserve error volatility. Also, we show that lower accruals quality is associated with higher forecast dispersion indicating more disagreement among analysts. Our results hold consistent with decomposed components of accruals, innate and discretionary, and conclude that both managerial discretion and basic operations of firms affect insurers analysts earnings forecasts.
Keywords: Insurance; Earning Management; Loss Reserves; Loss Reserve Error volatility; Managerial Discretion; Accruals Quality; Analyst forecast; Earnings forecast; Property-Casualty Insurers.
Borrowers Perceptions of Lending Conditions: Worlds Apart or Closer than Close?
by Dimitrios Anastasiou, Konstantinos Drakos
Abstract: Given that lenders and borrowers interact in the same (credit) market, an interesting research question that arises is whether the demand side of the market correctly comprehends the actual credit market conditions that are primarily shaped by the supply side. We explore this by utilizing available surveys conducted separately for the two sides of the credit market and empirically investigate whether, and by which mechanism, demand-side perceptions relate to supply-side credit conditions. Our results indicate that demand-side perceptions do not match one-for-one supply-side conditions, but are rather described by an adaptive mechanism. This mechanism suggests that demand-side perceptions are modified every period by a fraction of last periods perception error. Additionally, we find that demand-side perceptions systematically overshoot the actual conditions, and this overshooting is accentuated for periphery countries and smaller firms.
Keywords: Loan Terms and Conditions; Bank Lending Conditions; Bank Lending Survey; Survey of Access to Finance; Borrowers’ Perceptions.
An assessment of the Fundamental Review of the Trading Book:
The capital requirement impact on a stylised financial portfolio
by Pederzoli Chiara, Torricelli Costanza
Abstract: This paper assesses the impact on capital requirements of the Fundamental Review of the Trading Book (FRTB) based on a stylised financial portfolio sensible to the risk factors affected by the review. Our results show the order of magnitude of the increase across the two regulations and the two possible approaches: the standard approach and the internal model approach. We further disentangle the components of the expected increase implied by the FRTB. The most interesting result emerges for the internal model approach, whereby the increase in the capital charge is attributable not only to the change in the risk measure and the inclusion of longer liquidity horizons, but most importantly to the dampening of the diversification benefit.
Keywords: fundamental review of the trading book; capital requirements; trading portfolio; VaR; stressed VaR; expected shortfall; liquidity risk; bank regulation; Basel Committee on Banking Supervision.
Borrower characteristics and loan performance: Evidence from micro and small Greek firms
by Vasileios Giannopoulos, Eleftherios Aggelopoulos, Antonios Georgopoulos
Abstract: Using a unique dataset of 3,294 micro and small enterprise loans granted before the recession by one of the four systemic banks in Greece, this study identifies diverse borrower-specific characteristics of these loans that transformed into non-performing loans (NPLs) during the recession. Also, we capture how their impact on NPLs changes as recession escalates. More detailed, we find that homeownership, the bank deposit relationship, the existence of own facilities, the business equipment lending purpose, and the cash loan collateral are crucial factors for NPL avoidance in recession years. In contrast, high levels of loan to turnover ratio and the age of the firms owner seem to increase substantially the delinquency risk. The paper provides originality as it explicitly utilizes primary micro-specific information substantially differing from the related literature that utilizes aggregated, macroeconomic data, with important implications for policymakers and bank staff regarding lending and repayment policies.
Keywords: Non-Performing Loans; micro and small enterprises; borrower-specific characteristics; Greece.
Assessing competitiveness in MENA banking sector in the context of quality of the institutional variables and political conflict risk
by Hatem Elfeituri
Abstract: This paper investigates competitive conditions and the role of institutional environments and political risk as revenue drivers for commercial banks in the Middle East and North Africa (MENA) region. We examine an extended period (1999-2015) consisting of political and economic unrest and transformation that includes the 2007 global crisis and the recent Arab uprising 2011. The Panzar-Rosse model and Arrelano-Bond and GMM methodologies have been employed to examine such issues. Our findings indicate that MENA banks are still operating under monopolistic competition conditions. With regards to political instability, bank revenues are negatively affected by such matters and policies that favour deregulation and a more inclusive role for all stakeholders in the banking system to stimulate the growth. The findings are beneficial in terms of valuable policy implications to structure the banking system of these countries optimally.
Keywords: Panzar-Rose; Institutional; Monopolistic; Competition; Deregulation; MENA.
Corporate bonds, exchange rates and business strategy
by Konstantina Vartholomatou, Konstantina Pendaraki, Athanasios Tsagkanos
Abstract: We examine the relationship between corporate bonds and exchange rates in the USA and Greece highlighting asymmetries and volatility among markets. A theoretical framework is constructed to treat the issue of corporate bonds. The employed methodology concerns the QARDL-ECM that is applied to non-stationary regressors. In Greece, our key findings point that changes in corporate bonds are mainly driven by changes in exchange rates. The quantile estimates show that the strength of long-run relationship increases as the risk of default for the country diminishes. In the USA, both long-run and short-run relationships between variables are defined. The changes in exchange rates are mainly driven by changes in corporate bonds. The quantile estimates exhibit a non-symmetrical pattern of the relationship which is a clear evidence of possible financing problems in enterprises. A key contribution concerns the suggestion of a sound policy for the enterprises for attaining stable growth in an environment of financial stress and asymmetry.
Keywords: corporate bonds; exchange rates; asymmetry; QARDL-ECM.
Is the era of the day-of-the-week anomaly over?
by Ngan Duong Cao, Vu Quang Trinh, Thanh Quoc Nguyen
Abstract: While an extensive body of literature has investigated the existence of the day-of-the-week anomaly in different stock markets globally, their findings can only provide implications for potential arbitrage opportunities for domestic investors in the investigated markets. We, therefore, add to these studies by investigating the possibility of international arbitrage activities using such an anomaly, after accounting for currency risk. Initially, we re-confirm the disappearance of the effect in the US market (S&P500), implying that US domestic investors can no longer exploit the day-of-the-week trading strategy in their home market. Further, we test whether investors who use the US dollar as the main trading currency (including US investors) can exploit the anomaly in foreign markets. We employ the daily values of representative indices and the national currencies of the three ASEAN countries (Singapore, Thailand and Malaysia) from 1995 to 2014. We find that the anomaly is evident in all three markets and can be exploited by foreign investors. Furthermore, the Thai exchange is the best investment destination for foreign investors with the highest returns and lowest currency risk. The profitability of this trading strategy is independent of economic activities and significantly dependent on the performance and conditions of the financial markets.
Keywords: stock exchange; anomaly; ASEAN markets; arbitrage; international investment; recession; financial crisis.
Bank risk and charter value: the role of opacity
by Chris Brune, Kevin Lee, Scott Miller
Abstract: In this paper, we explore the linkage between bank opacity and bank charter value. We find that opacity contaminates charter value and therefore reduces the ability of charter value to restrain risk-taking in banking. As bank assets become more complex and opaque with the increased use of derivative assets like mortgage backed securities, asset backed securities, and collateralised debt obligations, etc., it becomes more difficult to gauge the true value of banks and the true risk of the bank activities.
Keywords: banks; opacity; charter value; market discipline; financial crisis.
The CEO identity of sovereign wealth funds and target firms' performance
by Alfonso Del Giudice, Giovanni Petrella
Abstract: The impact of sovereign wealth funds (SWFs) on target firms' performance is unclear. Previous empirical studies find conflicting evidence, with some documenting a positive impact and others finding a negative impact on target firms' performance. In contrast to previous researchers, we include in the sample both listed and unlisted targets and reconsider the classification of political influence on SWF managerial decisions, observing the identity of the CEO rather than using the Truman score. We identify a 'political CEO' as such if s/he is a political officer or a former political officer or if s/he belongs to the same family as a political officer. Using a sample of 226 deals, we find evidence of an impact of SWF investments on target firms' performance. The presence of a political CEO has a positive impact on target firms' profitability, showing that closer ties to political power play an important role.
Keywords: sovereign wealth fund; SWF; political connection; target firm performance.
Forecasting the yield curve with macroeconomic information - evidence from European markets
by Isabel Maldonado, Carlos Pinho, Francisco Rodríguez De Prado, Carla Azevedo Lobo
Abstract: In this paper we analyse the predictive content of the introduction of macroeconomic variables in term structure dynamic models. We tested the dynamic models using data from the public debt, inflation rate and annual variation of the industrial production index for four European countries: Portugal, Spain, the UK and Germany. Results obtained for the period from January 1990 to December 2012 indicate that considering macroeconomic factors makes a positive contribution to the improvement of forecasts for different countries and maturities. However, the paper presents evidence of time-varying forecast accuracy, not only across yield maturities and forecast horizons, but also over data sub-periods.
Keywords: yield curve; dynamic factor models; forecasting; out-of-sample forecasting evaluations.