What drives risk-taking incentives embedded in bank executive compensation? Some international evidence

This paper analyzes the country determinants of risk-taking incentives embedded in bank executive compensation using hand-collected international panel data on 135 publicly-traded banks in 26 countries. We exploit time-series changes in investor protection within a country and confirm that stronger protection leads to a higher vega. Moreover, the positive effect on vega is higher in countries where stronger bank competition and more extensive safety nets increase bank shareholders' risk-taking incentives. Our analysis controls for changes in bank regulation, systemic banking crises, and government bailouts. The results are robust to alternative specification models, alternative proxies for country determinants, and remain when we apply a more traditional cross-sectional analysis.     

What drives investment bank performance? The role of risk,liquidity and fees prior to and during the crisis

This paper examines factors that affect the performance of investment banks in the G7 and Switzerland. In particular, we focus on the role of risk, liquidity and investment banking fees. Panel analysis shows that those variables significantly impact upon performance as derived from Stochastic Frontier Analysis (SFA). Given our sample also comprises the financial crisis, we further test for regime switches using dynamic panel threshold analysis. Results show different underlying regimes, in particular over the financial crisis. In addition, a strong positive effect of Z-Score on performance for banks in the regime of low default risk is reported, while fee-income ratio has also a positive impact for banks with low level of fees. On the other hand, liquidity exerts a negative impact. Notably, there is a clear trend of mobility of banks across the two identified threshold regimes with regard to risk a year before the financial crisis. Our results provide evidence that recent regulation reforms regarding capital adequacy and liquidity requirements are on the right track and could enhance performance.     

What drives international portfolio flows?

Understanding what drives international portfolio flows has important policy implications for countries wishing to exert some control on the size, direction and volatility of the flows. This paper empirically assesses the relative contribution of common (push) and country-specific (pull) factors to the variation of bond and equity flows from the US to 55 other countries. Using a Bayesian dynamic latent factor model, we find that more than 80% of the variation in bond and equity flows is due to push factors from the US to other countries. Hence global economic forces seem to prevail over domestic economic forces in explaining movements in international portfolio flows. The dynamics of push and pull factors can be partially explained by US and foreign economic fundamentals.     

What drives China's current account?

The paper offers an empirical taxonomy of the factors driving China's current account. A simple present-value model with non-tradeable goods explains more than 70 percent of current account variability over the period 1982–2007, including the persistent surpluses since 2001. It also correctly predicts the decline of China's current account since 2008. Expected increases in the prices of non-tradeables (e.g. housing and medical care) and expected declines in net output (GDP less investment and government spending) are the main channels of external adjustment. Much of China's current account surplus seems driven by shocks that have global effects by persistently depressing the world real interest rate. This is consistent with recent theoretical models that suggest that factors related to China's domestic financial development are key in understanding global imbalances.     

What drives stochastic risk aversion?

This paper examines determinants of stochastic relative risk aversion in conditional asset pricing models. Novel time-series specification tests are proposed as direct extensions of Guo, Wang, and Yang (2013, JMCB)'s model using nonlinear state-space models with heteroskedasticity. I then establish the following facts. First, the surplus consumption ratio implied by the external habit formation model is the most important determinant of relative risk aversion. Second, the CAY of Lettau and Ludvigson (2001a) without a look-ahead bias and the short term interest rate explain part of relative risk aversion. Third, the estimated risk aversion from 1957Q2 to 2010Q3 is countercyclical and positive. Finally, the selected models explain part of the momentum and the financial distress premiums.     

What drives stock returns in Japan?

Financial Markets and Portfolio Management - We investigate systematic factors driving stock returns and stock return predictability in Japan. We find that dividend yield, cash-flow yield, and...     

What drives the disappearing dividends phenomenon?

We study the determinants of dividend payout policy and examine the role of liquidity, risk and catering in explaining the changes in propensity to pay. Our results indicate that risk plays a major role in firms’ dividend policy. The evidence substantiates from a large sample of firms representing 18 countries over the sample period from 1989 to 2011. For firms in the US, France, UK and Other European markets, liquidity is additionally an important determinant of dividend policy. We find that, although catering incentives persist only among firms in common law countries and not in civil law countries, after adjusting for risk there is little support for catering theory even among firms incorporated in common law countries. Our results indicate that catering incentives reflect the risk-reward relationship in the changing propensity to pay dividends.     

What drives mortgage fees in Australia?

We investigate the factors that affect total, ongoing and origination fees of mortgages in Australia during the period 1996 to 2011. We find that banks charge significantly higher total and ongoing fees than mortgage corporations although they require lower origination fees. We also find that fee levels are dependent on loan size, loan‐to‐value ratio and loan features like term of the loan and presence of an offset account. Further, we confirm that lenders trade‐off higher (lower) interest rates with lower (higher) fee levels. Finally, our results show that mortgage fees are significantly affected by market conditions.     

What drives local lending by global banks?

We find that the lending behavior of global banks’ subsidiaries throughout the world is more closely related to local macroeconomic conditions and their financial conditions than to those of their owner-specific counterparts. This inference is drawn from a panel dataset populated with bank-level observations from the Bankscope database. Using this database, we identify ownership structures and incorporate them into a unique methodology that identifies and compares the owner and subsidiary-specific determinants of lending. A distinctive feature of our analysis is that we use multi-dimensional country-level data from the BIS international banking statistics to account for exchange rate fluctuations and cross-border lending.     

What drives credit dollarization in transition economies?

This paper provides an in-depth analysis of the use of foreign currencies in the lending activities of banks in transition economies. The impact of bank and firm variables on credit dollarization is studied in an optimal portfolio allocation model and estimated using new aggregate data for 21 transition economies for the period 1990–2003. Empirical results provide evidence that credit dollarization is the combined outcome of domestic deposit dollarization and banks’ desire for currency-matched portfolios beyond regulatory requirements. The effects of international financial factors and natural hedges are less robust across alternative specifications. The paper further discusses the role of regulations in affecting the impact of these factors on credit dollarization and calls for more developed domestic forward foreign exchange markets.     

What drives the performance of convertible-bond funds?

This paper examines the performance of US mutual funds that invest primarily in convertible bonds. Multivariate cross-sectional analyses show a significant relation between a fund’s performance and its asset composition: the higher the difference in the percentage of assets invested in convertible bonds compared to the percentage invested in stocks, the higher the performance, on average. We show that this result can be explained by factors associated with investment opportunities in the convertible-bond market and trading strategies related to convertible arbitrage, as typically performed by hedge funds. Overall, convertible-bond fund performance measured by alpha is comparable to a passive investment in stocks, bonds, and convertible bonds. This performance is the result of weak selection skills and successful timing strategies related to convertible arbitrage.     

What drives corporate minority acquisitions around the world? The case for financial constraints

In this paper, I examine minority block acquisitions from 1990 to 2009, as well as possible theories for the presence of equity stake purchases. I find that target firms are financially constrained. Acquisitions significantly increase their stock prices at announcement, along with their investment expenditures afterwards. In the two years following the acquisition, 27% (9%) issue new equity (debt) and raise 27% (24%) of their market capitalization. These findings support the theory that equity stakes certify the investment opportunities of target firms. I also find some support for the contracting motive, mostly in countries with good investor protection and a well-performing banking sector.     

What drives individual investors in the bear market?

This study uses a unique dataset from a large anonymous brokerage firm to examine the net investment of individual investors during a bear market. The study's empirical evidence reveals that individual investors provide liquidity by acting as net buyers. Particularly, male and younger investors tend to have a higher buying intensity than the others during the market downturn. Besides, better performances when the market crashed encourage investors to be overconfident, thus exhibiting self-attribution bias since we do not find similar results in the bull-market subsample. Results from the stock-level analysis imply that investors tend to buy stocks with worse short-term past performance, higher liquidity, and larger market capitalization. Our findings on the individual investor trading behaviour cannot be explained by either a superior stock-picking ability or a higher tendency to gamble during the market downswing.     

What do bank acquirers want? Evidence from worldwide bank M&A targets

What drives bankers to create larger and larger, often multinational banking groups? In this paper we investigate whether the targets in cross-border bank M&As are materially different from those banks targeted in domestic M&A deals. The main message of this paper is that, with few exceptions, domestic and foreign investors target similar banks. In particular, and contrary to what one might expect, bank size does not have a different effect on the probability of being a domestic or a cross-border target, instead it has a positive and highly significant effect in both cases. We find that the main differences between national and international M&As are the characteristics of the countries where the banks operate.     

What drives international equity correlations? Volatility or market direction?

We consider impulse response functions to study the impact of both return and volatility on the correlation between international equity markets. Using data on the US (as the reference country), Canada, the UK and France equity indices, empirical evidence shows that without taking into account the effect of return, there is an (asymmetric) effect of volatility on correlation. The volatility seems to have an impact on correlation especially during downturn periods. However, once we introduce the effect of return, the impact of volatility on correlation disappears. These observations suggest that, the relation between volatility and correlation is an association rather than a causality. The strong increase in the correlation is driven by the past of the return and the market direction rather than the volatility.     

What drives acquisitions?: Market valuations and bidder performance

Given the recent theoretical development that documents stock market misvaluations’ driven acquisition, this paper examines the relation between market valuations and bidder performance. We focus on hot stock markets and find that bidder reactions to mergers, in both the short- and long-run period, are consistent with the predictions of investors’ sentiment (optimism) after controlling for target type and method of payment. Managers that undertake mergers during bullish periods are rewarded by the generalized upward trend of the market in the short-run. However, this is followed by long-term reversals as the market learns only gradually that many of the mergers undertaken during hot periods were not carefully evaluated and were made under the pressure of ‘urge to merge’ to take advantage of the overall market status of a particular period.     

Cross-border bank mergers: What lures the rare animal?

Although domestic mergers and acquisitions (M&As) in the financial services industry have increased steadily over the past two decades, international M&As were until recently relatively rare. Moreover, the share of cross-border mergers in the banking industry is low compared with other industries. This paper uses a novel dataset of over 3000 mergers that took place between 1985 and 2001 to analyze the determinants of international bank mergers. We test the extent to which information costs and regulations hold back merger activity. Our results suggest that information costs significantly impede cross-border bank mergers. Regulations also influence cross-border bank merger activity. Hence, policy makers can create environments that encourage cross-border activity, but information cost barriers must be overcome even in (legally) integrated markets.     

What drives volatility persistence in the foreign exchange market?

We propose a new empirical specification of volatility that links volatility to the information flow, measured as the order flow in the market, and to the price sensitivity to that information. The time-varying market sensitivity to information is estimated from high-frequency data, and movements in volatility can therefore be directly related to movements in order flow and market sensitivity. Empirically, the model explains a large share of the long-run variation in volatility. Importantly, the time variation in the market's sensitivity to information is at least as relevant in explaining the persistence of volatility as the rate of information arrival itself. This may be evidence of a link between changes over time in the aggregate behavior of market participants and the time-series properties of realized volatility.     

What drives the systemic banking crises in advanced economies?

This paper examines the drivers of post-war “systemic” banking crises in advanced economies. Using binary response models and a balanced panel of data, we show that persistently large departures from the long-run trend in housing and stock markets best predict the crises. Similar deviations in credit markets do not add to the explanatory power of the model that combines housing and stock market dynamics. Indicators capturing financial market risk perception also have high explanatory power. These findings indicate that extrapolative forecasts and neglect of tail risk drive asset market boom-bust cycles and systemic banking crises. Cycles in credit markets are driven by cycles in real-estate and stock markets before the crises. Additionally, capital inflow bonanzas fuel the stock and credit booms that spark systemic crises.     

What drives asymmetric dependence structure of asset return comovements?

We examine the determinants of return comovements of three different asset classes and provide critical insights on the key macroeconomic and non-macroeconomic factors which drive the asset return comovements during economic contraction and expansion regimes. We show that amongst the macroeconomic factors, interest rate and inflation have significant effect on the return comovements during the economic contraction regime whilst risk aversion significantly affects the return comovements during the economic expansion regime. The non-macroeconomic factors, output uncertainty, bond illiquidity and depth of recession contribute significantly in explaining the variations of return comovements for all asset pairs during both economic contraction and expansion periods except for real estate-based portfolios. Our results are robust to alternative model specification that uses regime switching MGARCH model.