Measuring Integrated Market and Credit Risk in Bank Portfolios: An Application to a Set of Hypothetical Banks Operating in South Africa

The banking crises of the ‘90s emphasize the need to model the connections between financial environment volatility and the potential losses faced by financial institutions resulting from correlated market and credit risks. Due to the number of variables that must be modeled and the complexity of the relationships an analytical solution is not feasible. We present here a numerical solution based on a simulation model that explicitly links changes in the relevant variables that characterize the financial environment and the distribution of possible future bank capital ratios. This forward looking quantitative risk assessment methodology allows banks and regulators to identify potential risks before they materialize and make appropriate adjustments to bank portfolio credit qualities, sector and region concentrations, and capital ratios on a bank by bank basis. It also has the potential to be extended so as to assess the risks of correlated failures among a group of financial institutions (i.e., systemic risk analyses). This model was applied by the authors to the study of the risk profile of the largest South African Banks in the context of the Financial System Stability Assessment program undertaken by the IMF in 1999. In the current study, we apply the model to various hypothetical banks operating in the South African financial environment and assess the correlated market and credit risks associated with business lending, mortgage lending, asset and liability maturity matches, foreign lending and borrowing, and direct equity, real estate, and gold investments. It is shown to produce simulated financial environments (interest rates, exchange rates, equity indices, real estate price indices, commodity prices, and economic indicators) that match closely the assumed parameters, and generate reasonable credit transition probabilities and security prices. As expected, the credit quality and diversification characteristics of the loan portfolio, asset and liability maturity mismatches, and financial environment volatility, are shown to interact to determine bank risk levels. We find that the credit quality of a bank's loan portfolio is the most important risk factor. We also show the risk reduction benefits of diversifying the loan portfolio across various sectors and regions of the economy and the importance of accounting for volatility shocks that occur periodically in emerging economies. Banks with high credit risk and concentrated portfolios are shown to have a high risk of failure during periods of financial stress. Alternatively, banks with lower credit risk and broadly diversified loan portfolios across business and mortgage lending are unlikely to fail even during very volatile periods. Asset and liability maturity mismatches generally increase bank risk levels. However, because credit losses are positively correlated with interest rate increases, banks with high credit risk may reduce overall risk levels by holding liabilities with longer maturities than their assets. Risk assessment methodologies which measure market and credit risk separately do not capture these various interactions and thus misestimate overall risk levels.     

Does the Stock Market Compensate Banks for Diversifying into the Insurance Business?

This paper explores a wide range of corporate restructurings, all available deals from wire services, in the banking and insurance sectors that led to bancassurance ventures. An event study methodology is employed to calculate excess returns on and around the deals’ announcement date. Using both univariate and multivariate analysis the paper finds bank driven mergers, deal's size and regional categorization all triggering positive and significant market reactions. Unlike the univariate framework, multivariate analysis shows that geographic focus and language are not significant factors. The results also indicate that markets are indifferent with respect to bank withdrawals from the bank‐insurance operations. Finally, Canadian, U.S. and European bank‐insurance deals produce positive results, while Australasian bidders offer statistically insignificant equity returns.     

Social Media in Union Communications: An International Study with UNI Global Union Affiliates

This article assesses the use of social media in union communications based on an international survey with 149 unions affiliated with UNI Global Union. High expectations of union modernization, leadership and pressures from members are likely to drive the agenda of social media within unions. However, the actual use of different channels is based on organizational variables such as membership base and participation in communities of practice. Beliefs about the anticipated benefits and risks of social media were not found to be influential in these early assessments. Implications for union communication strategies are discussed.     

Systemic risk,real GDP growth,and sentiment

Review of Quantitative Finance and Accounting - Using a mixed frequency VAR methodology, which can accommodate variables with different frequencies in a VAR framework, we model the relation between...     

Profit shifting and tax-rate uncertainty

Using firm-level data for 1,084 parent firms in 24 countries and for 9,497 subsidiaries in 54 countries, we show that tax-motivated profit shifting is larger among subsidiaries in countries that have stable corporate tax rates over time. Our findings further suggest that firms move away from transfer pricing and toward intragroup debt shifting that has lower adjustment costs. Our results are robust to several identification methods and respecifications, and they highlight the important role of tax-rate uncertainty in the profit-shifting decision while pointing to an adjustment away from more costly transfer pricing and toward debt shifting.     

Liquidity commonality in order-driven trading: evidence from the Athens Stock Exchange

We examine the presence of liquidity commonality in the order-driven Athens Stock Exchange (ASE). Unlike the majority of liquidity commonality studies that focus on the bid–ask spread, our analysis extends deeper in the Limit Order Book, providing insight on the price impact of both small and large trades. We utilize a 6-month FTSE/ATHEX-20 intraday data set to estimate the liquidity factor model of Chordia et al. (2000). To this end, we conduct single-equation analysis as well as panel data analysis with the use of two-way clustered errors, correcting for simultaneous firm and time correlations. Moreover, we apply standard principal component analysis on stock liquidities to extract the marketwide liquidity component. We find that liquidity commonality is low at the bid–ask spread, whereas it increases deeper in the book; consequently, large traders face liquidity risks associated with both individual stock and marketwide illiquidity. Moreover, our empirical evidence hints that liquidity commonality is asynchronous, suggesting that the ASE trading process includes various levels of information speed. Our analysis contributes to the understanding of liquidity commonality in order-driven trading, especially in emerging markets like the ASE where trading activity is limited and information speed is low.     

Robust Event Studies for Derogation from Suspension of Concentrations in Greece during the Period 1995–2008

This paper examines the possible effect of the derogation from suspension of concentrations by the Hellenic Competition Commission (HCC) on the stock performance of the requested companies. For this reason, we examined 16 companies listed in the Athens Stock Exchange (A.S.E) that are involved to 13 requested derogations from suspension during the period 1995–2008 by applying and assessing the results of three different event study methodologies (market model, mean adjusted return model and market adjusted return model). From the empirical findings, we conclude that the argument of the requested companies concerning the subsequent negative effect on their stock performance if the derogation from suspension by the HCC is delayed or not granted does not hold. On the contrary, the average abnormal and cumulative returns of the requested companies are positive and statistical significant. In addition, the results of the three event study methodologies are robust.     

The Innovation Value Chain in New Technology‐Based Firms: Evidence from the U.K.

Innovation is central to the survival and growth of firms, and ultimately to the health of the economies of which they are part. A clear understanding both of the processes by which firms perform innovation and the benefits which flow from innovation in terms of productivity and growth is therefore essential. This paper demonstrates the use of a conceptual framework and modeling tool, the innovation value chain (IVC), and shows how the IVC approach helps to highlight strengths and weaknesses in the innovation performance of a key group of firms—new technology‐based firms. The value of the IVC is demonstrated in showing the key interrelationships in the whole process of innovation from sourcing knowledge through product and process innovation to performance in terms of the growth and productivity outcomes of different types of innovation. The use of the IVC highlights key complementarities, such as that between internal R&D, external R&D, and other external sources of knowledge. Other important relationships are also highlighted. Skill resources matter throughout the IVC, being positively associated with external knowledge linkages and innovation success, and also having a direct influence on growth independent of the effect on innovation. A key benefit of the IVC approach is therefore its ability to highlight the roles of different factors at various stages of the knowledge–innovation–performance nexus, and to show their indirect as well as direct impact. This in turn permits both managerial and policy implications to be drawn.     

Towards a synthesis of theories of State failure

This paper examines the three main categories of State intervention. Before approaching the analysis of intervention, I attempt to shed light on the forming of social choices and the decisions of State rulers. I show how market process and property rights solve problems pertaining to social choice, which in turn stems from the application of the majority rule in a democratic society. Along these lines I view how the State fails to regulate externalities, stabilize the economy and redistribute income. For this purpose the following research applies the theory of property rights, the theory of rational expectations and the theory of public choice respectively to each of the above problems. The conclusion points to a synthesis of these theories, offering a highly demonstrative categorical framework of critique against State intervention. The argument claims that independent non-collective institutions work better than State intervention. (JEL: P16, D72, H23)     

Information Systems for “Wicked Problems”

The objective of this commentary is to propose fruitful research directions built upon the reciprocal interplay of social media and collective intelligence. We focus on “wicked problems” – a class of problems that Introne et al. (Künstl. Intell. 27:45–52, 2013) call “problems for which no single computational formulation of the problem is sufficient, for which different stakeholders do not even agree on what the problem really is, and for which there are no right or wrong answers, only answers that are better or worse from different points of view”. We argue that information systems research in particular can aid in designing appropriate systems due to benefits derived from the combined perspectives of both social media and collective intelligence. We document the relevance and timeliness of social media and collective intelligence for business and information systems engineering, pinpoint needed functionality of information systems for wicked problems, describe related research challenges, highlight prospective suitable methods to tackle those challenges, and review examples of initial results.