The risk effects of combining banking, securities, and insurance activities

We create synthetic universal banks to examine the impact of securities and insurance activities on the banking firms’ risk. We find that these nonbank activities reduce the overall risk to the firm but increase systematic market risk—thus reducing the firm’s ability to diversify. Moreover, the unit price of risk does not appear to contain a risk premium to price the enhanced systemic risk exposure that might be engendered by greater convergence across financial firms. Our finding suggests that if there are net gains to universal banking, potential gains from synergies and demand effects must be powerful enough to overcome the disadvantages of increased systemic risk exposure. The results suggest that diversification benefits, when considered in isolation from the other implications of expanded bank powers, are not sufficiently large to justify expanding bank powers into nonbank securities and insurance underwriting activities.     

Diversification,efficiency and risk of banks: Evidence from emerging economies

This paper examines the impact of business diversification of banks on their risk, with efficiency taken into consideration as a conduit. Using bank-level data from more than 1000 commercial banks in 39 emerging economies during the period of 2000–2016, we find that increased business diversification exerts two competing effects on bank risk. The direct effect of increased diversification bolsters the stability of banks, but it is offset by the indirect effect whereby lowered efficiency, which is resulted from higher diversification, increases the riskiness of banks. Thus, the overall benefits from bank business diversification on bank stability rely on the trade-off of the two competing forces.     

Beyond clusters: How regional geographic signature affects firm value and risk

Existing studies examining how geography affects firm outcomes primarily consider how clusters affect performance. We examine how regional geographic signature—industry clusters, regional economic diversity, region size, and regional innovativeness—affects firm value and systematic and unsystematic risk using a sample of publicly traded American bank holding companies. After controlling for endogeneity of clusters, we find that locating in large and innovative regions enhances firm value, while locating in clusters and diversifying into many regions reduces value. Clusters reduce systematic risk and increase unsystematic risk, while economic diversity and innovativeness increase systematic risk. Thus, geographic locales exert multifaceted influences on value and risk, and we need to consider more than industry clusters and geographic diversification when considering geographic influence. Copyright © 2013 ASAC. Published by John Wiley & Sons, Ltd.     

Corporate Hedging and the High Idiosyncratic Volatility Low Return Puzzle

The literature offers various explanations to either support or refute the Ang et al. ( 2006 ) high idiosyncratic volatility low return puzzle. Fu ( 2009 ) finds a significantly positive contemporaneous relation between return and exponential generalized autoregressive conditional heteroskedastic idiosyncratic volatility. We use corporate hedging to shed light on this puzzle. Conceptually, idiosyncratic volatility matters to investors who face limits to diversification. But limits to diversification become less relevant for firms that consistently hedge. We confirm the main finding in Fu ( 2009 ), but only for firms that do not consistently hedge. For firms that adopt a consistent hedging policy, idiosyncratic volatility, whether contemporaneous or lagged, is insignificant in Fama–MacBeth regressions, controlling for size, book‐to‐market, momentum, liquidity, and industry effects.     

Re-examining the risk–return relationship in banks using quantile regression

Financial data for the US banks listed during 2001–2007 are analysed to re-examine the risk–return relationship in the banking industry. A key feature of this study is the analysis of the changing distribution of return on equity across banks and over time by the quantile regression (hereafter QR) model and a meaningful comparative analysis with the results of the ordinary least squares estimates is examined. The following conclusions are drawn from the empirical results. First, while a positive risk–return relationship is presented for the profitable banks, the risk–return relationship is negative for the profitless banks. Second, the ‘V’ shape relationship between bank risk and profitability identified by this study could satisfactorily explain the existing risk–return puzzle among the prior empirical studies.     

New insights into the impact of the introduction of futures trading on stock price volatility

We examine whether, and to what extent, the introduction of trading in share futures contracts on individual stocks (i.e., individual share futures, or ISFs) has impacted on the systematic risk and volatility of the underlying shares. The use of ISFs allows a unique experimental design that complements existing work on index futures. Our major findings are as follows. First, we found a general reduction in systematic risk on individual stocks after the listing of futures. Second, we found evidence of a decline in unconditional volatility. Third, we found mixed evidence concerning the impact on conditional volatility. Fourth, the introduction of futures was found to impact on the market dynamics, as reflected by a change in the asymmetric volatility response, although the direction of that change is stock‐specific. In general, the results point to a number of features that are case‐specific and provide new insights into the mixed results that are typical of existing studies. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:237–255, 2001     

Islamic financing and bank risks: The case of Malaysia

We examine whether Islamic financing can explain three important bank risks in a country with a dual banking system: credit risk, interest‐rate risk, and liquidity risk. Using Malaysian data, we find that commercial banks with Islamic financing have significantly lower credit and liquidity risks but significantly higher interest‐rate risk than banks without Islamic financing. There is also evidence that bank size is significantly related to credit risk; the proportion of loan sales to total liabilities and bank size are significant determinants of interest‐rate risk; and off‐balance‐sheet financing, the extent of securitization, loan volatility, bank capital, and bank size are statistically significantly related to liquidity risk. © 2005 Wiley Periodicals, Inc.     

Regime‐switching in stock index and Treasury futures returns and measures of stock market stress

We investigate bivariate regime‐switching in daily futures‐contract returns for the US stock index and ten‐year Treasury notes over the crisis‐rich 1997–2005 period. We allow the return means, volatilities, and correlation to all vary across regimes. We document a striking contrast between regimes, with a high‐stress regime that exhibits a much higher stock volatility, a much lower stock–bond correlation, and a higher mean bond return. The high‐stress regime is associated with higher average values of stock‐implied volatility, stock illiquidity, and stock and bond futures trading volume. The lagged implied volatility from equity‐index options is useful in modeling the time‐varying transition probabilities of the regime‐switching process. Our findings support the notions that: (1) stock market stress can have a material influence on Treasury bond pricing, and (2) the diversification benefits of combined stock–bond holdings tend to be greater during times with relatively high stock market stress. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:753–779, 2010     

A smiling bear in the equity options market and the cross-section of stock returns

We propose a measure for the convexity of an option-implied volatility curve, IV convexity, as a forward-looking measure of risk-neutral tail-risk contribution to the perceived variance of underlying equity returns. Using equity options data for individual US-listed stocks during 2000–2013, we find that the average realized return differential between the lowest and highest IV convexity quintile portfolios exceeds 1% per month, which is both economically and statistically significant on a risk-adjusted basis. Our empirical findings indicate the contribution of informed options trading to price discovery in terms of the realization of tail-risk aversion in the stock market.     

Emerging Equity Market Volatility

Abstract

This paper considers two emerging markets that are under-researched, Kenya and Nigeria. It offers a comprehensive view of four time properties that emerged from the empirical time series literature on asset returns: (1) the predictability of returns from past observations; (2) the auto-regressive behavior of conditional volatility; (3) the asymmetric response of conditional volatility to innovations; and (4) the conditional variance risk premium. Results of the exponential GARCH (EGARCH) model indicate that asymmetric volatility found in the U.S. and other developed markets also characterized the Nigerian stock exchange. In Kenya, however, the asymmetric volatility coefficient is significant and positive, suggesting that positive shocks increase volatility more than negative shocks of an equal magnitude. The Nairobi Stock Exchange (KSE) returns series report negative but insignificant risk-premium parameters. In Nigeria (NSE), return series exhibit a significant and positive time-varying risk premium. The results also show that expected returns are predictable, that the auto-regressive return parameters (? ₁ ) are significant in both Kenya and Nigeria. Finally, the GARCH parameter (b) is statistically significant, indicating that volatility persistence is present in the two emerging markets studied.     

经济多元化对澳门地区商业银行风险及绩效的影响

随着“一带一路”倡议的实施和粤港澳大湾区的建设,澳门经济多元化发展迎来了新的机遇。本文利用2012—2018年的澳门宏观经济数据和银行层面数据,探讨了经济多元化对银行破产风险及经营绩效的影响。结果表明,在现阶段随着澳门经济多元化水平的提升,澳门商业银行破产风险也随之上升,并且经济多元化也导致了澳门商业银行的经营绩效下滑。基于研究结论,我们为澳门经济多元化背景下的银行管理和政策制定提出了几点建议,以资参考。     

Examining the Return–Volatility Relation for Foreign Exchange: Evidence from the Euro VIX

We compare the return–volatility relation for the euro currency to the equivalent relation for the equity market, examining the sign, symmetry, and strength of the relation. We employ the euro‐currency exchange‐traded fund (FXE) and its associated option implied volatility index (the EVZ), whereas previous studies only employ equities and/or realized volatility. The equity studies find a negative asymmetric return–volatility relation for implied volatility, with a strong relation when large market movements occur. We find that the euro return–volatility relation can possess either a positive or negative sign, is asymmetric, and has a weaker relation. Thus, the sign and strength of the euro relation differs from the equivalent equity relation. Our quantile regressions show that both the positive and negative contemporaneous returns of the euro result in increased volatility in the extreme quantiles of the conditional distribution, with the contemporaneous effect showing a stronger relation when the euro depreciates. We also find that the volume of the euro‐currency ETF options affects the return–volatility relation for the euro ETF. Overall, the results here expand the concept originally restricted to equities, with the surprising results that the return‐implied volatility relation is weaker and the asymmetric return sometimes is positive for the euro currency. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 34:74–92, 2014     

Competition and bank stability in the MENA region: The moderating effect of Islamic versus conventional banks

This paper investigates the impact of competition on bank stability using data from 276 banks across eighteen MENA countries between 2006–2015. We controlled for financial inclusion, productivity, and macroeconomic instability in addition to several different control variables, including bank size, efficiency, diversification and leverage. The two-step system GMM suggested that banks facing little competition tended to take less insolvency and credit risks and enjoy more profitability. Furthermore, we found that the competition-fragility effect is more prominent for Islamic banks than conventional ones in MENA countries. This study contains some significant policy implications for regulators looking to improve bank stability.     

刍议商业银行加强中小企业信贷风险管理问题

当前,我国中小企业普遍面临着融资困难的状况,给中小企业发展带来了巨大的阻力。原因主要是由于中小企业自身实力较弱,经营管理制度不成熟,商业银行对中小企业信贷存在较高的风险等。商业银行在对中小企业信贷风险管理方面应该遵循全面性、系统性、谨慎性的原则,建立有用的、适合地区实际情况的信用风险管理体系,制定风险管理制度、程序和措施,提高银行贷款的质量,及时识别可能存在的风险,对风险进行监测并及时控制,从而确保信贷风险在合理的范围内,尽量减少不良贷款,确保银行资产的合理流动的目标。     

Pricing of card payment services in Scandinavian banking: a comment

Willesson [(2009). Pricing of card payment services in Scandinavian banking. The Service Industries Journal, 29(3), 387–399] purports to demonstrate that when it comes to pricing of card payment services, Scandinavian banks with foreign operations will typically align themselves with the ‘pricing tradition’ in their foreign market(s). Unfortunately, a problem with Willesson's approach is that for several banks in his sample the foreign pricing tradition happens to coincide with the pricing strategy that the bank uses in its home market. As a result, it is impossible to determine whether these banks have really opted for a strategy of national responsiveness.     

Improving volatility prediction and option valuation using VIX information: A volatility spillover GARCH model

We develop a new generalized autoregressive conditional heteroskedasticity (GARCH) model that accounts for the information spillover between two markets. This model is used to detect the usefulness of the CBOE volatility index (VIX) for improving the performance of volatility forecasting and option pricing. We find the significant ability of VIX to predict stock volatility both in-sample and out-of-sample. VIX information also helps to greatly reduce the option pricing error. The proposed volatility spillover GARCH model performs better than the related approaches proposed by Kanniainen et al. (2014, J Bank Finance, 43, pp. 200-211) and P. Christoffersen et al. (2014, J Financ Quant Anal, 49, pp. 663–697).     

Information assimilation and stock return synchronicity: Evidence from an investor relations management platform

In this paper, we employ a unique information assimilation measure for listed firms in China based on their communications with investors through an online platform designated by the China Securities Regulatory Commission (CSRC). We examine whether a firm's efforts in enhancing investors’ information assimilation, such as providing more quality clarifications and explanations, helps facilitate the incorporation of firm-specific information in stock prices and reduces stock return synchronicity. We find robust evidence that more quality-clarifying communications contribute to lower stock return synchronicity after controlling for other information sources, and the decrease in synchronicity is mostly due to increased firm-specific information rather than noise. The causal relationship is established using a stacking DID approach and a PSM method. In a further analysis, we find that more quality communications can strengthen investors’ reaction to good news and smooth their reaction to bad news. Our study provides direct evidence that enhanced information assimilation benefits firms by entrenching more firm-specific information into stock prices.     

Dealer spread and portfolio selection under price risks: evidence from the gold service industry

The bid and ask quotes as well as portfolio selection decisions of gold dealers who face a gold price risk are investigated within a continuous-time framework. The research integrates into a systematic analysis the decision of asset allocation in financial economics as well as the decision of a bid–ask spread in a market microstructure. The holding rate of gold is correlated to the intensity and jump size of the Poisson process, which is a hedging demand for gold assets against the risk of extreme events. According to empirical analysis from the gold service industries, the gold spread return is related to the expected return, volatility and jump risks of gold prices.     

Are Foreign Banks Better Performers Than Domestic Counterparts? Examining the Financialization Hypothesis in Mexico

This article analyzes the relationship between “financialization” and the performance of credit institutions in Mexico over the period 1999–2013. On average, foreign banks have higher cost-to-income ratio and return on assets than domestically owned banks. Non-interest income to gross revenue positively contributes to foreign bank profits, which highlights income other than conventional banking transactions. When considering references in the literature to non-interest income as a proxy for financialization, our results imply that domestic banks are more dependent on traditional lending, such as interest-earning assets, whereas foreign banks seem to engage in greater diversification to support profitability. Overall, the banking system reveals tendencies (“financialization”) that can possibly work against credit facilitation in Mexico.     

Bank Profitability and Capital Regulation: Evidence from Listed and non-Listed Banks in Africa

This study investigates the determinants of African bank profitability while controlling for bank capital regulation. Using static and dynamic panel estimation techniques, the findings indicate that bank size, total regulatory capital, and loan loss provisions are significant determinants of the return on assets of listed banks compared to non-listed banks. Also, regulatory capital has a more significant (and positive) impact on the return on assets of listed banks than non-listed banks particularly when listed banks have sufficient regulatory capital ratio. We also find that higher regulatory thresholds have a negative impact on the return on asset of non-listed banks.