Banking finance

This paper investigates which events of World War II (WWII) the US investors (at that time) considered as turning points (structural breaks) of the war. The empirical study employs daily Dow Jones industrial average stock index and volatility from January 1939 to December 1945 and applies structural shift oriented test to determine endogenously the structural breaks during the WWII period. Results show that the majority of the wartime events (on and off the battlefield) labelled important by historians did result in structural breaks in both price movement and stock returns volatility (risk). These results have major implications for investors of the present and future. 1 Tsiakas is able to show that events during trading and non-trading hours both have substantial effect on both stock price and volatility. During wartime, events can take place during trading and non-trading hours. 2 According to Mazouz et al. (2009) investors under-react to both positive and negative shocks, irrespective of the magnitude of the shocks.

Despite widely documented criticisms, price-limit rules are present in many equity markets around the world. Using a game-theoretic model, we argue that, if the cost of monitoring a market is high, price-limit rules are beneficial. Empirical tests based on a cross section of 43 equity markets across five continents support our theoretical prediction. We find that the probability of the existence of price-limit rules is greater in markets that incur higher monitoring costs due to poorer business disclosure, more corruption and less efficiency in legal, regulatory and technological environments.

Empirically, co-skewness of asset returns seems to explain a substantial part of the cross-sectional variation of mean return not explained by beta. This finding is typically interpreted in terms of a risk averse representative investor with a cubic utility function. This paper questions this interpretation. We show that the empirical tests fail to impose risk aversion and the implied utility function takes an inverse S-shape. Unfortunately, the first-order conditions are not sufficient to guarantee that the market portfolio is the global maximum for this utility function, and our results suggest that the market portfolio is more likely to represent the global minimum. In addition, if we do impose risk aversion, then co-skewness has minimal explanatory power.

This paper examines herding behavior in global markets. By applying daily data for 18 countries from May 25, 1988, through April 24, 2009, we find evidence of herding in advanced stock markets (except the US) and in Asian markets. No evidence of herding is found in Latin American markets. Evidence suggests that stock return dispersions in the US play a significant role in explaining the non-US market's herding activity. With the exceptions of the US and Latin American markets, herding is present in both up and down markets, although herding asymmetry is more profound in Asian markets during rising markets. Evidence suggests that crisis triggers herding activity in the crisis country of origin and then produces a contagion effect, which spreads the crisis to neighboring countries. During crisis periods, we find supportive evidence for herding formation in the US and Latin American markets.

Bank loan commitments are examined in the context of option pricing models and a valuation formula is obtained. The partial takedown phenomenon, which is both distinctive and vexatious, is considered in detail. Finally, estimates of the value of U.S. bank loan commitments and their sensitivity to interest rate changes are provided. *The authors gratefully acknowledge the helpful suggestions of George Kanatas and an anonymous referee. Financial support for this project was provided by Northwestern University's Banking Research Center. 'As of year-end 1978, unused formal loan commitments at larger commercial banks in the U.S. were approximately S200 billion, or 15 percent of the banking system's footings. At the same time, loans made under commitments totalled approximately S115 billion, or 15 percent of gross loans at all commercial banks.

This paper is the product of a joint research project, carried out by PRAESA and Babylon, Centre for Studies of the Multicultural Society at Tilburg University (the Netherlands). It reports on a language survey conducted amongst primary school children in the Greater Cape Town as well as in the rural/town areas of the Western Cape province between 1999 and 2002. The focus is on language policy in schools in relation to language vitality indicators such as language repertoire, choice, proficiency, dominance and preference. The findings show the dominance of English in the metropolis and its growing influence in the traditionally Afrikaans-dominant rural areas. There is also considerable interest in isiXhosa, both from speakers of isiXhosa themselves and from Afrikaans-and English-speakers. The outcomes of the survey stand to inform existing databases on language statistics in education with a view to informing language policy and practice. In this way, language surveys in multilingual societies provide information crucial to informed language planning. UNIVERSITY OF CAPE TOWN u PRAESA's series of occasional papers is meant to provide an opportunity for the research done by staff members and associated researchers working in the domain of language policy in education to obtain initial exposure to an interested peer audience. It is hoped that feedback will improve the final version in which this research is eventually published or distributed. u Daryl Braam is a former primary school teacher who currently conducts research into aspects of school language policy and its role in whole school development. Other research interests include surveys and language mapping.

We compare forecasts of the realized volatility of the pound, mark and yen exchange rates against the dollar, calculated from intraday rates, over horizons ranging from one day to three months. Our forecasts are obtained from a short memory ARMA model, a long memory ARFIMA model, a GARCH model and option implied volatilities. We find intraday rates provide the most accurate forecasts for the one-day and one-week forecast horizons while implied volatilities are at least as accurate as the historical forecasts for the one-month and three-month horizons. The superior accuracy of the historical forecasts, relative to implied volatilities, comes from the use of high frequency returns, and not from a long memory specification. We find significant incremental information in historical forecasts, beyond the implied volatility information, for forecast horizons up to one week.

We examine the information content of the CBOE Crude Oil Volatility Index (OVX) when forecasting realized volatility in the WTI futures market. Additionally, we study whether other market variables, such as volume, open interest, daily returns, bid-ask spread and the slope of the futures curve, contain predictive power beyond what is embedded in the implied volatility. In out-of-sample forecasting we find that econometric models based on realized volatility can be improved by including implied volatility and other variables. Our results show that including implied volatility significantly improves daily and weekly volatility forecasts; however, including other market variables significantly improves daily, weekly and monthly volatility forecasts.

This paper explains the recent decline in bank asset quality using the notion of information reusability. Banks are viewed as information processors; they exist because of their advantage in extracting the surplus associated with the reusability of borrower-specific information.

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. In this paper we identify some of the main factors behind systemic risk in a set of international large-scale complex banks using the novel CoVaR approach. We find that short-term wholesale funding is a key determinant in triggering systemic risk episodes. In contrast, we find no evidence that a larger size increases systemic risk within the class of large global banks. We also show that the sensitivity of system-wide risk to an individual bank is asymmetric across episodes of positive and negative asset returns. Since short-term wholesale funding emerges as the most relevant systemic factor, our results support the Basel Committee's proposal to introduce a net stable funding ratio, penalizing excessive exposure to liquidity risk.

A number of recent papers examine the relationship between default risk and equity returns, and the results are mixed. These studies employ different measures of default risk and we find that correlations between eight diverse measures of default risk tend to be less than 50%. Nonetheless, we find that the relationship between stock returns and diverse measures of default risk tends to be consistent; default risk is a significant determinant of stock returns and this relationship is ''hump backed'', as predicted by Garlappi and Yan (2011).

In this paper we try to shed additional light on the question of integration or segmentation of European equity markets by studying the statistical relevance of some intuitively appealing international factors of return. The relevance of these factors is also investigated through time in order to evaluate a possible increase in market integration over the recent past.

We examine the impact of CEO turnover announcements on bondholder wealth, stockholder wealth, and overall firm value. Using publicly traded data for the period from 1973 to 2000, we find evidence consistent with both the wealth transfer and signaling hypotheses. Specifically, we find that CEO turnover events are associated with lower bondholder values, higher stockholder values, and that net changes in firm value are a function of turnover type (forced vs voluntary and outside vs inside firm replacements) and the riskiness of the firm's debt (investment vs noninvestment grade). Overall, the results contribute to the understanding of the effects of corporate governance mechanisms, of which CEO turnover is an extreme form, on bondholders. JEL Classification: G34; G14

The paper investigates the determinants of bankruptcy in three representative unbalanced samples of Italian firms for the periods 1989-1991, 1992-94 and 1995-97. Two important results are that: i) the degree of relative firm inefficiency measured as the distance from the efficient frontier has significant explanatory power in predicting bankruptcy ii) qualitative regressors such as customers' concentration and strength and proximity of competitors have significant predictive power and suggest that banks should not restrict their monitoring activity to balance sheet variables. These findings remain significant after controlling for balance sheet liquidity and profitability variables usually considered in these estimates.

This paper traces developments in the credit risk measurement literature over the last 20 years. The paper is essentially divided into two parts. In the ®rst part the evolution of the literature on the credit-risk measurement of individual loans and portfolios of loans is traced by way of reference to articles appearing in relevant issues of the Journal of Banking and Finance and other publications. In the second part, a new approach built around a mortality risk framework to measuring the risk and returns on loans and bonds is presented. This model is shown to oer some promise in analyzing the risk-return structures of portfolios of credit-risk exposed debt instruments.

The market for angel capital ± where individuals provide risk capital directly to small, private, often start-up ®rms ± operates in almost total obscurity. Very little is known about the market's size, scope, the type of ®rms that raise angel capital, and the types of individuals that provide it. In this paper I present evidence on the angel market gathered from my ®eld research which has involved interviews with more than a dozen angel investors in the Dallas/Fort Worth area. The angel market appears to be a very heterogeneous and localized market. With that quali®cation in mind, I present some common characteristics of the angels I interviewed, and how they select and monitor their investments. I pay particular attention to how they address adverse selection and moral hazard problems. I compare their behavior with venture capital limited partnerships in the more formal market for venture capital.

This paper examines the relationship between bank lending rates and their cost of funds in New Zealand. Our results show that on average mortgage rates respond more quickly to changes in the cost of funds than base business lending rates. We also find an asymmetry in the initial (short-run) response of banks to changes in funding costs; in particular, our results show banks adjust mortgage rates downwards faster than upwards. The speed to which lending rates revert back to their equilibrium relationship with funding costs varies across the lending markets. We find the adjustment speed is faster when mortgage rates are below equilibrium, whereas it is slower when business lending rates are above long-run levels in relation to funding costs. Our analysis suggests that banks prefer the plain-vanilla type of lending such as mortgages in comparison to small business lending consistent with asymmetric information associated with business loans.

Risk managers are increasingly required by international Regulatory Institutions to adopt accurate techniques for the measurement and control of portfolios financial risks. The task requires first the identification of the different risk sources affecting the portfolio and the measurement of their impact, then after: the adoption of appropriate portfolio strategies aimed at neutralising these risks. The comprehensive concept of Value-at-Risk (VaR) as a maximum tolerable loss, with a given confidence interval, has become in this regard the industry standard in risk management.

by David S. Jones and Kathleen Kuester King

To lessen forbearance, the FDIC Improvement Act of 1991 (FDICIA) requires that undercapitalized banks be subject to prompt corrective actions. We show that from 1984 through 1989, the vast majority of banks exhibiting a high risk of insolvency would not have been considered undercapitalized based on the current risk-based capital (RBC) standards, and so would not have been subject to mandatory corrective actions under FDICIA. We present evidence suggesting the usefulness of the RBC ratios could be enhanced substantially by adopting an improved standard for loan loss reserve adequacy and modifying the RBC risk weights to account for the greater credit risks of problem assets.

Author Keywords: Risk-based capital; Capital regulation; Prompt corrective action; Early warning models; Forbearance

JEL classification codes: G28

The benefits of listing a company's stock on a foreign exchange to achieve better global market integration have been quite extensively examined. What has been overlooked in the finance literature is an attempt to explain why the New York Stock Exchange (NYSE) tends to be bypassed in favor of the London market and other exchanges when firms select foreign exchanges for listing. This paper explains the behavior of firms in their selection of foreign stock markets for listing by using a signalling model. Another purpose of this study is to address the current dispute between the NYSE and the Securities and Exchange Commission (SEC) regarding the desire of the NYSE to relax its registration requirements in order to gain more listings by foreign companies.

In this paper we estimate the effect of particular price incentives on consumer payment patterns using transaction-level data. We find that participation in a loyalty program and access to an interest-free period, both of which lower the price of credit card use, tend to increase credit card use at the expense of alternative payment methods, such as debit cards and cash. Specifically, we find that a loyalty program increases the probability of credit card use by 23 percentage points and access to the interest-free period increases the probability by 16 percentage points. Interestingly, the pattern of substitution from cash and debit cards is different in each of these cases. A loyalty program reduces the probability of cash use by 14 percentage points and has little effect on debit card use, while access to the interest-free period has little effect on cash use but reduces the probability of debit card use by 19 percentage points. We find these effects to be economically significant and large enough that they can help to explain observed aggregate payments patterns. An implication is that the Reserve Bank reforms of the Australian payments system are likely to have influenced observed payment patterns.

Unfettered nationwide bank branching raises the issue of whether consolidation of banksÕ``back-oce'' operations, such as their payment processing, reduces operating costs. Whether centralized processing of payments reduces costs depends on the size and range of scale economies, the relative prices of data processing and telecommunication inputs, and changes in technology in addition to the number of sites operated. While consolidating payment operations into fewer sites may reduce average data processing costs, those cost savings may be more than oset by associated increases in telecommunications expenses. To investigate the potential eects of consolidation on future banking operations, we look at the experience of the Federal Reserve in consolidating its Fedwire electronic funds transfer operation over 1979 to 1996. Previous research suggested that scale economies in Fedwire payment processing were minimal and that the observed declines in average Fedwire production costs were largely attributable to technical advance. Our estimates suggest more nearly the opposite. We ®nd that the Fedwire funds transfer operation exhibited large scale economies but little technical advance beyond that already embodied in the technology-adjusted input prices of data 0378-4266/99/$ ± see front matter Ó 1999 Elsevier Science B.V. All rights reserved. PII: S 0 3 7 8 -4 2 6 6 ( 9 8 ) 0 0 1 0 8 -3 processing and telecommunication inputs. We also ®nd that the consolidation of Fedwire into fewer oces contributed around one-fourth of the overall reduction in Fedwire average cost. Ó

Real estate prices frequently deviate from their fundamental value due to rigid supply, heterogenous goods, and various market imperfections. This has two contrasting effects on the stability of banks as major financiers of real estate investment. On the one hand, higher prices increase the value of collateral and net wealth of home-owners, which reduces the likelihood of credit defaults and can potentially enhance soundness of banks. On the other hand, persistent deviations from fundamentals may foster adverse selection of increasingly risky creditors by banks seeking to expand their loan portfolios, making them more prone to distress. We test these competing hypotheses using unique data on real estate markets and banks in Germany. Our results support the notion that deviation of house prices from their fundamental value contributes to bank distress. We did not find significant association between house price changes and bank distress. Our findings suggest the importance of accounting for the developments in fundamental value of real estate prices when evaluating their impact on bank stability.

The market for angel capital ± where individuals provide risk capital directly to small, private, often start-up ®rms ± operates in almost total obscurity. Very little is known about the market's size, scope, the type of ®rms that raise angel capital, and the types of individuals that provide it. In this paper I present evidence on the angel market gathered from my ®eld research which has involved interviews with more than a dozen angel investors in the Dallas/Fort Worth area. The angel market appears to be a very heterogeneous and localized market. With that quali®cation in mind, I present some common characteristics of the angels I interviewed, and how they select and monitor their investments. I pay particular attention to how they address adverse selection and moral hazard problems. I compare their behavior with venture capital limited partnerships in the more formal market for venture capital.

This paper reviews empirical evidence on the use of bank lines of credit as a source of corporate liquidity. Traditional explanation for lines of credit is that they provide insurance against liquidity shocks, in much the same as way hoarding cash does. However, recent empirical research suggests that access to lines of credit is contingent on the credit quality of the borrower as well as the financial condition of the lender. These findings suggest that lines of credit are an imperfect substitute for cash as a source of corporate liquidity.

In this paper we analyse a comprehensive database of 149,378 recovery rates on Italian bank loans. We investigate a new methodology to compute the recovery percentage that we suggest to consider as a mixed random variable. To estimate the probability density function of such a mixture, we propose the mixture of beta kernels estimator and we analyse its performance by Monte Carlo simulations. The application of these proposals to the Bank of Italy's data shows that, even if we remove the endpoints from the support of the recovery rate, the density function estimate is far from being a beta function.

We examine share price responses to announcements of bank credit agreements for exchange listed and NASDAQ lirms and test whether there are systematic differences between large and small capitalization firms. For small firms both renewals and initiations of loan agreements generate significantly positive share price effects. In contrast, for large firms there is little evidence that bank credit announcements convey information to the capital market. Our results are consistent with arguments of Fama and Diamond that it is primarily small, less prestigious firms that receive benefits from screening and monitoring services associated with bank loans.

This paper examines the impact of capital-based regulation on the insurer's risk and capital adjustments in the US property-liability insurance industry. We conduct the three-stage least squares (3SLS) procedure to estimate a simultaneous equations model. The key finding is that undercapitalized insurers increase capital to avoid regulatory costs and take more risks to generate higher returns. We also investigate firm characteristics that determine the insurer's capital structure. The results indicate that insurers appear to rely heavily on retained earnings to make up their capital shortage and insurers with greater growth opportunity may hold high levels of capital to control for agency problems. Robustness tests with an alternative risk measure and subsamples present consistent results.

This paper provides a comprehensive analysis of the effects of the privatization of the Commonwealth Bank of Australia (CBA) on the BankÕs performance and that of the rival banks. First, we find that the major rival banks reacted negatively to the privatization announcements although the initial (partial privatization) and the final (full) privatization announcements elicited stronger stock market reaction from the rival banks. Second, we find that the CBAÕs long-term stock market performance improved markedly as the proportion of government ownership decreased, with the BankÕs cumulative abnormal returns being 50% more than those of its rivals three years after the Bank had been fully privatized. Also, the CBA has not only been very efficient in reducing cost and improving its profitability in the post-privatization period, it has outperformed its rivals on almost all the operating performance measures and has become the most profitable bank in Australia. A particularly noteworthy finding is that the improvements in the CBAÕs operating and stock market performance and the rival banksÕ reaction to the partial and full privatization announcements were strongest after the Bank had been fully privatized. The implication of the results for governments contemplating privatization of state-owned enterprises is that full privatization is necessary in order to achieve strong gains in efficiency, profitability and stock market performance.

This paper provides a critical survey of the large and diffuse literature on credit cards, debit cards and ATMs. We argue that because there are still many outstanding issues and questions about the pricing, use and substitutability of these payment mechanisms, that there are significant further opportunities for research in these areas. A large number of questions are examined in this survey, including the pricing of credit cards, the impact of networks on the provision and pricing of ATMs, as well as the tradeoffs that consumers make between different types of payment mechanism, including debit cards, credit cards and ATMs. Importantly, this paper is also amongst the first to provide new evidence on this latter question from bank level data (from Spain). We conclude that point of sale (debit card) and ATM transactions are substitutes, and that ATM surcharges impacts point of sale volume significantly.

When the CEO is also chairman of the board, principal-agent conflicts may be exacerbated because of the consolidation of the decision management and the decision control processes. Our results suggest that cost efficiency and return on assets are (1) lower for Chairman-CEO banks, (2) positively (negatively or not) related to Nonchairman-CEO (Chairman-CEO) ownership, and (3) unrelated to institutional and large blockholders ownership, and the proportion of inside (outside) directors. These results suggest top management team structure affects performance and internal monitoring devices may not be as effective as envisioned in the literature.

We analyse the motives and market valuation of various forms of stock market delisting. We show that firms that delist voluntarily are likely to have come to the market to rebalance their leverage rather than to finance their growth opportunities. During their public life, their leverage remained very high, they could not raise equity capital, and their profitability, growth opportunities, and trading volume declined substantially. Their stock prices decrease significantly on and before the announcement date. These results hold even after controlling for agency, asymmetric information, and liquidity effects, and suggest that firms delist voluntarily when they fail to benefit from listing.

Using 7900 bank observations from 80 countries for the 1988-1995 period, this paper examines the extent and effect of foreign presence in domestic banking markets. We investigate how net interest margins, overhead, taxes paid, and profitability differ between foreign and domestic banks. We find that foreign banks have higher profits than domestic banks in developing countries, but the opposite is the case for developed countries. Estimation results suggest that a increased presence of foreign banks is associated with a reduction in profitability and margins for domestic banks.

This paper examines the relevance of institutional investors' investment horizon, as reflected in the response of firm investment to internal cash flows. We argue that institutional investors with longer investment horizons have greater incentives and efficiencies to engage in effective monitoring. This improved monitoring mitigates asymmetric information and agency problems, and in turn reduces the wedge between the costs of internal and external funds. As a result, the sensitivity of firms' investment outlays to internal cash flows decreases in the presence of institutional investors with long-term investment horizons. Using a sample of 8402 US firms over the period 1981-2008, we provide empirical evidence consistent with these arguments. (O. Guedhami). 1 In contrast, large public firms outside the US are generally not widely held, but rather are controlled by large shareholders, implying that the primary agency conflict in these firms is the expropriation of minority investors by controlling shareholders (e.g., La Porta et al., 1999). We thank an anonymous referee for bringing this observation to our attention. A more elaborate discussion on the governance role of institutional investors is presented in the literature review section.

In this paper, we examine the effect of implicit seller reserves on the estimation of value-at-risk based on historical asset sales data. We direct our examination toward how and whether fine art might prove an appropriate form of loan collateral for banks and other financial institutions. Using a data set of French Impressionist paintings brought to auction from 1985 to 2001, we control for the effect of works that are bought in-house to construct a distribution of potential sale values that corrects for sample selection bias. It turns out that the downside risk surrounding deviations of auction prices from expert presale estimates depends critically on how buy-ins are incorporated. If downside risk is assessed solely on historical experience with successful auction sales, the data appear to support loan-to-value ratios between 50% and a 100% larger than loan-to-value ratios that countenance the existence of seller reserves. The auction process, however, is quantifiable and can reveal the necessary risk information required for loan consideration.

This article presents a modification of ruin option pricing model to estimate the implied probability of default from stock and option market prices. To test the model, we analyze all global financial firms with traded options in the US and focus on the subprime mortgage crisis period. We compare the performance of the implied probability of default from our model to the expected default frequencies based on the Moody's KMV model and agency credit ratings by constructing cumulative accuracy profiles (CAP) and the receiver operating characteristic (ROC). We find that the probability of default estimates from our model are equal or superior to other credit risk measures studied based on CAP and ROC. In particular, during the subprime crisis our model surpassed credit ratings and matched or exceeded KMV in anticipating the magnitude of the crisis. We have also found some initial evidence that adding off-balance-sheet derivatives exposure improves the performance of the KMV model.

In this paper, we examine the relationship between oil price and firm returns for 560 US firms listed on the NYSE. First, we find that oil price affects returns of firms differently depending on their sectoral location. Second, we find strong evidence of lagged effect of oil price on firm returns. Third, we test whether oil price affects firm returns based on different regimes and find that in five out of the 14 sectors this is indeed the case. Finally, we unravel that oil price affects firm returns differently based on firm size, implying strong evidence of size effects.

This paper looks at recent developments in house purchase loans and house prices in Spain and the linkages between them. It aims at identifying deviations of these variables from their equilibrium levels, and for this purpose, we estimate a vector error-correction model. The results show that both variables are interdependent in the long-run and that both variables were above their equilibrium level by the end of the sample period (2009:Q1). The paper also offers insight into how overvaluation (overindebtedness) in house prices can lead to a false sense of no overindebtedness (house prices overvaluation).

In recent papers [Szpiro (1986) and this issue], an approximate demandfor-insurance function was used to estimate the degree of relative risk aversion as a function of GNP, for 2 :'*i,izction of 15 countries. For most countries it was shown that constant relative risk aversion (CRRA) cannot be rejected.

The presented research tests cumulative prospect theory (CPT, [Kahneman, D., Tversky, A., 1979. Prospect theory: An analysis of decision under risk. Econometrica 47, 263-291; Tversky, A., Kahneman, D., 1981. The framing of decisions and the psychology of choice. Science 211, 453-480]) in the financial market, using US stock option data. Option prices possess information about actual investors' preferences in such a way that an exploitation of conventional option analysis, along with theoretical relationships, makes it possible to elicit investor preferences. The option data in this study serve for estimating the two essential elements of the CPT, namely, the value function and the probability weighting function. The main part of the work focuses on the functions' simultaneous estimation under CPT original parametric specification. The shape of the estimated functions is found to be in line with theory. Comparing to results of laboratory experiments, the estimated functions are closer to linearity and loss aversion is less pronounced.