The leverage effect and the basket-index put spread

Benchmark models that exogenously specify equity dynamics cannot explain the large spread in prices between put options written on individual banks and options written on the bank index during the financial crisis. However, theory requires that asset dynamics be specified exogenously and that endogenously determined equity dynamics exhibit a “leverage effect” that increases put prices by fattening the left tail of the distribution. The leverage effect is larger for puts on individual stocks than for puts on the index, thus increasing the basket-index spread. Time-series and cross-sectional variation in the leverage effect explains option prices well.     

Bailout uncertainty in a microfounded general equilibrium model of the financial system

This paper develops a micro-founded general equilibrium model of the financial system composed of ultimate borrowers, ultimate lenders and financial intermediaries. The model is used to investigate the impact of uncertainty about the likelihood of governmental bailouts on leverage, interest rates, the volume of defaults and the real economy. The distinction between risk and uncertainty is implemented by applying the multiple priors framework to beliefs about the probability of bailout.Results of the analysis include: (i) An unanticipated increase in bailout uncertainty raises interest rates, the volume of defaults in both the real and financial sectors and may lead to a total drying up of credit markets. (ii) Lower exante bailout uncertainty is conducive to higher leverage, which in turn raises moral hazard and makes the economy more vulnerable to expost increases in bailout uncertainty. (iii) Bailout uncertainty affects the likelihood of bubbles, the amplitude of booms and busts as well as the banking and the credit spreads. (iv) Higher bailout uncertainty is associated with higher returns’ variability in diversified portfolios and higher systemic risks, (v) Pre-crisis expansionary monetary policy reinforces those effects by inducing higher aggregate leverage levels. (vi) The larger the change in bailout uncertainty and the change in aversion to this uncertainty, the stronger the pre-crisis buildup and the deeper the ensuing crisis.A central policy implication of the analysis is that the vaguest is bailout policy prior to a crisis, the lower is the magnitude of investments destroyed or missed due to errors in evaluating bailout and other intervention policies. On the other hand, the clearer is bailout policy upon the eruption of a crisis, the smaller the contraction of credit and the destruction of investment activity.     

我国居民杠杆率现状及影响因素研究

近年来,我国居民部门杠杆率的快速上升引起社会各界关注。本文使用货币信贷和城镇储户调查数据,对我国居民部门杠杆率和偿债能力现状进行了分析,并运用各省住户贷款数据计算各省的居民杠杆率,使用面板数据模型对居民杠杆率上升的原因进行了实证分析。结果表明,房价的快速上涨和住房销售的增长都对居民部门杠杆率的上升有显著正向影响,其中房价上涨的影响程度更大。此外,金融发展水平和老年人抚养比对居民杠杆率有正向影响,少年人抚养比对居民杠杆率有负向影响。     

Institutional quality and corporate financing decisions around the world

We investigate the influence of the recent comprehensive institutional quality dimensions of Karolyi (2015), such as market capacity, operational efficiency, foreign accessibility, corporate transparency, legal protection, and political stability, on financing decisions of firms across 56 countries between 2000 and 2015. We find that stronger institutional quality or lower fundamental risks in a country ease firms' access to long-term debt, and equity financing. We attribute our results to institutional environments influencing financing decisions by shaping the severity of market frictions, such as agency conflicts and information asymmetry, and transaction costs. As a result, we conclude that any improvement in a country's institutional environment will boost firms' access to long-term financing, and thus longer-term investments that promote countries' economic growth will be more feasible. Our findings are robust to potential endogeneity issues.     

Leverage vs. feedback: Which Effect drives the oil market?

This article brings new insights on the role played by (implied) volatility on the WTI crude oil price. An increase in the volatility subsequent to an increase in the oil price (i.e. inverse leverage effect) remains the dominant effect as it might reflect the fear of oil consumers to face rising oil prices. However, this effect is amplified by an increase in the oil price subsequent to an increase in the volatility (i.e. inverse feedback effect) with a two-day delayed effect. This lead-lag relation between the oil price and its volatility is central to any type of trading strategy based on futures and options on the OVX implied volatility index. It is of interest to traders, risk- and fund-managers.     

Multiple bank regulators and risk taking

The potential for banks to arbitrage between regulators exists both in the US, with its multiple federal banking regulators, and in Europe, due to multinational banking. This paper models multiple regulators that have an agency bias, which can give rise to a “race to the bottom”. The model is used to analyze the interaction between the regulatory equilibrium and several salient pre-crisis features: rising bank leverage; wholesale funding with asymmetric information; and increasing supervisional costs to disentangling bank asset exposures. Each of these raises bank risk taking on its own, but regulatory competition is shown to be an amplification mechanism.     

Estimating switching costs after introducing Fixed-Mobile Convergence in Japan

In this study, based on a conjoint-type survey analysis, the switching cost of several Japanese telecom services are empirically examined simultaneously, contingent on each carrier’s bundling strategies. The results suggest the following conclusions. The hierarchy of switching costs is mobile phone service, fixed phone service, ISP (Internet Service Provider), and broadband access service, in descending order. Even if the government prohibits the formerly state-owned monopoly NTT from forming alliances with other carriers, the legacy NTT group would still command more than half of the market share under FMC if each carrier adopts a pure bundling strategy. If mixed bundling emerges as the primary strategy in the FMC market, the resulting type of competition from the introduction of FMC does not stimulate competitive pricing.     

Moderating effect of capital intensity on the relationship between leverage and financial distress in the U.S. restaurant industry

During the recent and ongoing economic turmoil, countless businesses have been facing financial distress and many have filed for bankruptcy. This issue is especially critical for the restaurant industry due to restaurants’ sensitivity to economic fluctuations. Therefore, the purpose of this study is to examine the financial distress issue in the U.S. restaurant industry. In particular, the study examines a moderating effect of capital intensity on the relationship between a firm's leverage and degree of financial distress. The dataset includes publicly traded U.S. restaurant firms during the period 1990–2008. The study measures the degree of financial distress by modified Z-scores, and findings suggest a positive moderating effect of capital intensity on the relationship between leverage and financial distress.     

Pecking order as a dynamic leverage theory

Static tradeoff theories, which do not explicitly treat the impact of transaction costs, do not explain the policy of asymmetry between frequent small debt transactions and infrequent large equity transactions. Nor do these theories explain why the debt ratio is allowed to wander a considerable distance from its alleged static optimum, or how much of a distance should be tolerated. We offer a class of diffusion models that mimic this behaviour in a stochastic-dynamic framework and are designed to optimize a financing strategy using any static tradeoff theory as input. The models developed reveal the determinants of the size and frequency of equity transactions and the range of values over which leverage variations are tolerated in four generic scenarios. They also yield a new formulation of the cost of capital that recognizes stochastic transaction costs and a penalty for deviation from any static-optimal leverage. Our class of models augments the pecking order theory, provides a flexible quantitative framework for its implementation as a decision tool, and facilitates the formulation of additional hypotheses for its empirical validation. Symmetrically, our results show the importance of dynamic factors in designing and interpreting empirical tests of static tradeoff theories. The results presented have important implications for the role played by static tradeoff theories in a stochastic-dynamic framework. One such implication is that the static-optimal leverage has no direct effect on the firm's leverage policy in this setting. The target leverage for refinancing transactions is different from the static-optimal leverage, and the mean leverage is generally different from both. As a consequence, the latter cannot be used to estimate the former. Another implication is that even when the mean leverage equals the static optimum, mean reversion is not an optimal behaviour and therefore not a legitimate test for the existence of a static tradeoff in a dynamic context. Still another implication is that wide variations in leverage ratios cannot be interpreted as evidence of leverage indifference. It follows that the pecking order theory is consistent with static tradeoff theories and does not require the assumption of leverage indifference.     

Firm leverage decisions: Does industry matter?

We use a standard capital structure mode l to investigate the firm leverage decisions of 1620 companies listed in the Australian Securities Exchange (ASX) across a span of 13 years (2000–2012), dividing the sample into mining and other industries (non-mining). We also test for significant differences in leverage decisions between these two groups by applying a dummy variable approach. Our findings show that fundamental differences exist between mining and non-mining companies when making leverage decisions. We find evidence that mining firms are more sensitive to profitability and asset tangibility where neither profitability nor asset tangibility has significant association for non-mining firms. Overall results suggest that industry-type does matter for firms making leverage decisions.