Statistical Methodologies for the Market Risk Measurement

This paper classifies statistical methodologies available for the marketrisk measurement. With the help of the weighted likelihood, a broad class ofnon-normal distributions, which are not generally considered so far, areapplied to possibly hetero-scedastic financial variables. The approach is compared with popular procedures such as GARCH and J. P. Morgan's using daily dataof 12 financial variables.     

Capital injection,restructuring targets and personnel management: The case of Japanese regional banks

A case study of the Japanese bank recapitalization by Hoshi and Kashyap (2005) identified a bank that overstated the progress of required personnel downsizing by shifting employees to subsidiaries. This paper asks if the recapitalization program had a design flaw. We focus on regional banks with a unique panel dataset of 81 banking groups that allows us to observe the employment levels of subsidiaries, in addition to those of parent banks, over fiscal 1994–2006. We estimate a labor-demand equation with sluggish adjustment to compare the employment patterns of public capital recipients and other banks. The result indicates that the shuffling of personnel to subsidiaries was a common response among banks that received large capital injections. Our finding highlights a tension between a reconstruction program and labor law when a country has a tight law on dismissal.     

Bank competition and monetary policy

There is an apparent theoretical discrepancy between the effects of monetary policy shocks on economies with differently competitive banking sectors. We employ cross-country data to investigate this hypothesis with two different approaches. First, using aggregate data we analyze the correlation between two indices: (i) a cumulative impulse response function providing an index of the effect of monetary policy shocks; and (ii) Panzar and Rosse's H-statistic as an index of the state of bank competition. Second, using disaggregated data we regress bank lending on the interaction of bank competition and monetary policy shocks. The first approach does not provide any evidence of a relationship between monetary policy shocks and bank competition. However, the second approach suggests that competition in the banking industry leads to smaller monetary policy effects on bank lending.     

Changes in the banking system and small business lending

Since small businesses typically rely on small banks as their primary source of financing, there are concerns that the wave of bank consolidation of the 1990s may have reduced the availability of loans to small businesses in the US. Using a panel of state-level banking information over 1993–2002, this paper shows that the Riegle–Neal Interstate Banking and Branching Efficiency Act of 1994 reduced the number of small banks, but not the amount of small business lending. We also show that small banks are participating less in small business lending. These results imply that the bank-lending channel of the monetary transmission mechanism became less important in the US in the late 1990s as a result of more firms borrowing from large banks that are less sensitive to monetary shocks.     

Wagner’s law,fiscal discipline,and intergovernmental transfer: empirical evidence at the US and German state levels

Does fiscal discipline restrain the government from increasing its budget size? To answer this question, this paper investigates whether Wagner’s law is satisfied for two types of states: US states, in which fiscal sovereignty is established, and German states, in which fiscal transfer dependence is high and budget constraints are softened. In US states, we demonstrate that Wagner’s law is validated, while some of the balanced budget requirements weaken the validity of the law. In German states, we find an “inverse” law, especially after the bailouts of Bremen and Saarland. The “inverse” law is a new channel of growth in government size and means that soft budget constraints cause significant negative correlation between government size and output. These results are robust regardless of whether intergovernmental fiscal transfers are taken into account, while they quantitatively change the validity of the law. Our findings imply that the characteristics of fiscal discipline are the prime determinants of the channel and degree of growth in government size.     

The response of firms to eligibility thresholds: Evidence from the Japanese value-added tax

It is common to define benefit eligibility for small business policies by restrictions on the firm size. This paper documents the effects of the value-added tax (VAT) threshold in Japan, focusing on the incentives for a large firm to “masquerade” as many small firms by separately incorporating business segments. A comparison of the corporate size distributions before and after the VAT introduction of 1989 shows a clustering of corporations just below the threshold—a pattern that is attributable to the behavioral responses. To rule out the confounding influences of the changes in the company attributes over the years, we applied a semiparametric density decomposition technique developed by DiNardo, Fortin, and Lemieux (DiNardo J., Fortin N.M., Lemieux T., Labor market institutions and the distribution of wages, 1973–1992: a semiparametric approach. Econometrica 1996; 64; 1001–1044). This study suggests that the masquerading behavior by firms may be commonplace in other settings.     

Asymptotic Expansion for Term Structures of Defaultable Bonds with Non-Gaussian Dependent Innovations

In the context of credit risk, the term structure models that have been studied in the literature are typically models driven by Brownian motion or standard jump diffusions. These models provide coherent modeling that is straightforward to implement. To make these models more flexible, we develop a discrete-time approximation of a continuous-time Vasicek term structure analysis with non-Gaussian and dependent innovations. Higher-order asymptotic theory enables us to evaluate the term structures of defaultable bonds. Numerical examples show that the effects of non-Gaussianity and the dependency of both risk-free rate and default process strongly influence the evaluation of defaultable bonds. As an application, we estimate the parameters of our proposed models for the Japanese corporate credit default swap market.     

Asymptotic Expansion Formula of Option Price Under Multifactor Heston Model

The stochastic volatility model of Heston (Rev Financ Stud 6(2):327–343, 1993) has found difficulty in describing some of the important features of implied volatility dynamics, leading to a quest for multifactor extensions as well as the incorporation of time-dependent model parameters. In this paper, an asymptotic expansion approach to the multifactor Heston model with time-dependent parameters is developed. The results of Benhamou et al. (SIAM J Financ Math 1(1):289–325, 2010) are extended and it is shown that the extension to the multifactor model involves an extra expansion term that captures the interaction between variance factors. The expansion formula under constant parameters can be explicitly computed and the incorporation of time-dependent parameters is straightforward under the framework. As illustration, a two-factor model is calibrated to data of index options and variance swaps and it is found that it is possible to distinguish a short-term and long-term variance factor from the implied volatility surface and variance swap rates. Moreover, the two-factor model is able to reproduce the shapes of the implied volatility surface during various market scenarios.