Modelling household finances: A Bayesian approach to a multivariate two-part model

We contribute to the empirical literature on household finances by introducing a Bayesian multivariate two-part model, which has been developed to further our understanding of household finances. Our flexible approach allows for the potential interdependence between the holding of assets and liabilities at the household level and also encompasses a two-part process to allow for differences in the influences on asset or liability holding and on the respective amounts held. Furthermore, the framework is dynamic in order to allow for persistence in household finances over time. Our findings endorse the joint modelling approach and provide evidence supporting the importance of dynamics. In addition, we find that certain independent variables exert different influences on the binary and continuous parts of the model thereby highlighting the flexibility of our framework and revealing a detailed picture of the nature of household finances.     

The protective role of saving: Bayesian analysis of British panel data

We explore whether a protective role for savings against future financial hardship exists using household level panel data for a nationally representative sample of UK households. We jointly model the incidence and extent of financial problems, using a dynamic two-part approach allowing different data-generating processes for experiencing financial hardship and the extent of financial hardship experienced. Our results show that: (i) saving on a regular basis mitigates against the likelihood of experiencing, as well as the number of, future financial problems; (ii) state dependence in financial problems exists; (iii) interdependence exists between financial problems and housing costs, with higher housing costs associated with an increased probability of experiencing financial hardship.     

Persistency of financial distress amongst Italian households: Evidence from dynamic models for binary panel data

This paper builds on existing studies on households’ financial distress and provides new evidence on the determinants of financial hardship in Italy and its persistence over time. It suggests a quantitative definition of financial distress based on the distribution of net wealth, and tests whether the probability of experiencing financial difficulty is persistent over time, using (random and fixed effects) dynamic models for binary panel data. The analysis exploits the longitudinal component of the Bank of Italy Survey on Household Income and Wealth for the period 1998–2006. Its results show that, after accounting for unobserved heterogeneity, past values of the outcome variable play a large part in explaining the probability of experiencing financial distress. In addition, the probability of financial vulnerability decreases with income and greater sophistication of the household portfolio and, at least in one of the model specifications, increases in areas with higher unemployment rates.     

Exploring household financial strain dynamics

Rising energy and food prices are causing living standards to fall across Europe and straining household budgets. The longer-term outlook for households is unclear as the dynamics of financial strain are not well understood. We address four important research questions on financial strain dynamics by applying a dynamic random coefficients probit model with duration and occurrence dependence to De Nederlandsche Bank (DNB) Household Survey panel data. We find no evidence that households become habituated or sensitised to financial strain over time unlike in studies of responses to stress. Entry into household financial strain is less likely when the household can cope by increasing earnings from work or by borrowing from family and friends but not by the economically inactive entering employment. Our third result is that the persistence of financial strain can be explained by a mutually-enforcing negative cycle through worse health but not through marital conflict or more short-sighted and risk averse decision-making. Finally, we find that neither income or wealth shocks affect financial strain in contrast to other studies. Further research into understanding the experience of financial hardship is warranted in the light of the economic challenges caused by the current cost of living crisis.     

Household portfolio allocation,uncertainty, and risk

Analysing the Panel Study of Income Dynamics and the Health and Retirement Study, we investigate the extent to which US households reduce their financial risk exposure when confronted with background risk. Our novel modelling approach – termed a deflated ordered fractional model – quantifies how the overall composition of a household portfolio with three asset classes adjusts with background risk, and is unique in recovering for any given risky asset class the shares that are reallocated to each safer asset category. Background risk exerts a significant impact on household portfolios, inducing a ‘flight from risk’ from riskier to safer assets.     

Who is unhappy for Brexit? A machine-learning,agent-based study on financial instability

In this paper, we assess the happiness cost of Brexit in the UK and the EU, using data from the Gallup World Poll. We implement a two-stage learning machine, using a naive Bayes classifier to extract happiness preferences of the population and then passing these onto an artificial neural network of attributes to generate dynamic happiness functions for each household, on an agent-based modelling framework. We find that there is a significant long-run cost in terms of both happiness and unemployment, which primarily affects the most vulnerable portion of the population. In addition, despite the expected instability in City's financial centre, the UK financial sector seems to be well equipped to deal with the repercussions, thus minimising the welfare costs for the country. Our findings extend the discussion of the economic costs of Brexit, by adding the welfare cost of the ensuing financial instability.     

Corporate governance and risk reporting in South Africa: A study of corporate risk disclosures in the pre- and post-2007/2008 global financial crisis periods

The 2007/2008 global financial crisis has reignited the debate regarding the need for effective corporate governance (CG) through sound risk management and reporting practices. This paper, therefore, examines the crucial policy question of whether the quality of firm-level CG has any effect on the quality and extent of corporate risk disclosures (CRD) in South Africa (SA) with particular focus on the pre- and post-2007/2008 global financial crisis periods. Using one of the largest datasets to-date on CG and CRD, from 2002 to 2011, and distinctively drawing on a multiple theoretical perspective, we find that CRD are largely ‘non-financial’, ‘historical’, ‘good news’ and ‘qualitative’ in nature over the ten-year period investigated. We also find that block ownership and institutional ownership are negatively associated with the extent of CRD, whilst board diversity, board size and independent non-executive directors are positively related to the extent of CRD. By contrast, dual board leadership structure has no significant connection with the extent of CRD. Our results are robust across a raft of econometric models that adequately address different types of endogeneity problems, as well as alternative CG and CRD proxies. Our findings are largely consistent with the predictions of our multi-theoretical framework that incorporates insights from agency, legitimacy, institutional, resource-dependence, and stakeholder theories.     

Variable annuities in a Lévy-based hybrid model with surrender risk

This paper proposes a market consistent valuation framework for variable annuities (VAs) with guaranteed minimum accumulation benefit, death benefit and surrender benefit features. The setup is based on a hybrid model for the financial market and uses time-inhomogeneous Lévy processes as risk drivers. Further, we allow for dependence between financial and surrender risks. Our model leads to explicit analytical formulas for the quantities of interest, and practical and efficient numerical procedures for the evaluation of these formulas. We illustrate the tractability of this approach by means of a detailed sensitivity analysis of the fair value of the VA and its components with respect to the model parameters. The results highlight the role played by the surrender behaviour and the importance of its appropriate modelling.     

A Dynamic Analysis of the Demand for Life Insurance

Prior research suggests that neither the choice to own life insurance nor the amount purchased is consistently related to the presence of children in the household. While these perplexing findings are based on a static framework, we alternatively examine life insurance demand in a dynamic framework as a function of changes in household life cycle and financial condition. Our results indicate both a statistically and economically significant relation between life events, such as new parenthood, and the demand for life insurance. We also provide new evidence in support of the emergency fund hypothesis: households in which either spouse has become unemployed are more likely than other households to surrender their whole life insurance.     

The Many Dimensions of Child Poverty: Evidence from the UK Millennium Cohort Study*

In this paper, we use a multidimensional framework to characterise child poverty in the UK. We examine the interdependencies amongst the different dimensions of multidimensional poverty and the relationship between multidimensional poverty and income poverty. We also explore the links between multidimensional poverty, income poverty and children's cognitive and non‐cognitive development. Our findings suggest that multidimensional poverty identifies many but not all of the same children classified using standard income poverty measures. Approximately 20 per cent of children are classified as poor on one measure but not the other. Children in workless households and ethnic minority children face the highest odds of growing up in both multidimensional poverty and income poverty. We find similar levels of persistence in multidimensional poverty and income poverty, with 17 per cent (18 per cent) of children experiencing persistent multidimensional (income) poverty and 10 per cent of children experiencing both persistent multidimensional poverty and persistent income poverty. Multidimensional poverty (both episodic and persistent) also has a detrimental impact on children's development over and above the negative impact of income poverty.     

On the characteristics of dynamic correlations between asset pairs

Recent research provides considerable evidence that correlations between assets change significantly over time and diversification benefits of correlations may vary substantially based on the time-varying measure of correlation used for different asset types. Our study evaluates and compares alternative time-series correlation modeling techniques according to both statistical and economic metrics, focusing specifically on individual asset pairs. We identify the moving correlation structure that best tracks the dynamic conditional correlation estimates using a large set of different financial time series encompassing 467 asset pairs in nine different asset classes. Results from our direct, statistical loss function based, and indirect, portfolio mean-variance based, forecast evaluations provide optimal window-length ranges for 36 asset-class pairs which should help in portfolio construction as well as risk management. Furthermore for robustness tests, we implement the model confidence set approach which, without a benchmark specification, produces a set of models constructed to contain the best models with a given level of confidence among competing forecast evaluations.     

Time-varying monetary-policy rules and financial stress: Does financial instability matter for monetary policy?

We examine whether and how selected central banks responded to episodes of financial stress over the last three decades. We employ a recently developed monetary-policy rule estimation methodology which allows for time-varying response coefficients and corrects for endogeneity. This flexible framework applied to the USA, the UK, Australia, Canada, and Sweden, together with a new financial stress dataset developed by the International Monetary Fund, not only allows testing of whether central banks responded to financial stress, but also detects the periods and types of stress that were the most worrying for monetary authorities and quantifies the intensity of the policy response. Our findings suggest that central banks often change policy rates, mainly decreasing them in the face of high financial stress. However, the size of the policy response varies substantially over time as well as across countries, with the 2008–2009 financial crisis being the period of the most severe and generalized response. With regard to the specific components of financial stress, most central banks seemed to respond to stock-market stress and bank stress, while exchange-rate stress is found to drive the reaction of central banks only in more open economies.     

The dynamics of US bank profitability

We examine the determinants of profitability for a large sample of US banks over the period 1984–2010. Specifically, we assess the extent to which short-run profits persist, and whether such persistence is affected by changes in regulation and the recent financial crisis. Our findings suggest that the competitive process reduces positions of abnormal profitability, albeit this is not immediate. There is also evidence that changes in regulation enacted during the 1990s affected both the level and persistence of bank profitability. The financial crisis of 2007–2010 appears to have resulted in an increase in the persistence of bank profitability.     

Bank Size and Household Financial Sentiment: Surprising Evidence from University of Michigan Surveys of Consumers

We analyze comparative advantages/disadvantages of small and large banks in improving household financial sentiment. Matching University of Michigan Surveys of Consumers household sentiment data with local banking market data from 2000 to 2014, we find surprising results—large banks have significant comparative advantages in boosting such sentiment. The findings apply across demographic groups, market types, and time periods, and are robust to different measurements and econometric methods. We contribute to the literatures on bank specialness, benefits and costs of small and large banks, household sentiment, and real effects of banking. We conjecture about the drivers of the findings, and discuss policy implications.     

A Comparison of the Efficacy of Liquidity,Momentum, Size and Book‐to‐Market Value Factors in Equity Pricing on a Heterogeneous Sample: Evidence from Asia

This paper compares the size and book‐to‐market value factors of Fama and French (1993) alongside Momentum of Jagadeesh and Titman ( 1993 ) with two Liu ( 2006 ) liquidity factors formed from 1 year rebalancing and 1 month rebalancing respectively. A heterogeneous and comprehensive sample of the top blue chip stocks of all national Asian equity markets with further differentiation undertaken between sub samples formed for Japan only and Asia excluding Japan for period January 2000 to August 2014. Our empirical results suggest that multifactor time invariant pricing models based on augmented capital asset pricing model (CAPM) framework are ineffective in explaining the cross section of stock returns in the presence of significant inter and intra‐market segmentation. However an alternative model specification based on a time varying parameter specification and using same sets of factors yields significant enhancements in explaining cross section of stock returns across universe. We find that momentum factor largely lacks significance while a time varying two factor model, based on CAPM plus liquidity factor, is optimal. The liquidity factor being that of Liu (2006) and annually rebalanced. Our findings are important for investment managers seeking appropriate factors and modelling techniques to hedge against risks as well as firm's financial managers seeking to reduce costs of equity capital.     

Estimating Volatility Persistence in Oil Prices Under Structural Breaks

Policy makers and financial market participants are interested in knowing how shocks affect the volatility of oil prices over time. We accurately compute the volatility persistence by incorporating endogenously determined structural breaks into a GARCH model. Contrary to previous findings, we find that oil shocks dissipate very quickly but have a strong initial impact. Understanding this behavior is not only important for derivative valuation and hedging decisions but for broader financial markets and the overall economy, for which there are significant consequences.     

金融市场参与、风险异质性与家庭幸福

本文研究了金融市场参与对家庭幸福的影响。理论分析显示,金融市场参与通过风险和收益对家庭幸福产生影响。本文运用2015年中国家庭金融调查数据,实证研究了金融市场参与对家庭幸福的影响。为克服内生性,本文选取工具变量,运用极大似然估计发现,家庭参与金融市场会显著提高家庭幸福的可能性。从投资风险的角度进一步研究发现,金融投资的风险异质性对家庭幸福有显著影响:家庭参与低风险金融投资会显著提高家庭幸福,参与高风险金融投资会显著降低家庭幸福。从民间借贷参与中,本文发现家庭参与民间借出款会显著提高家庭幸福的可能性。民间借贷投资风险对家庭幸福的异质性影响也是存在的,高风险借出款对家庭幸福有显著的负向影响。本文为理解家庭金融投资行为与幸福的关系提供了新的证据,可为构建和谐社会提供有益参考。     

Risk Analysis of Pension Fund Investment Choices

We provide a comprehensive and more consistent approach to analyse and compare the risk-return relationships of Australian superannuation investment options for the period January 1990 to December 2016. In estimating the risk profiles of the investment options, we allow for the movement of the asset classes over time by employing a varying coefficient panel estimation technique. We find that while risk increases across different investment options from moderate to aggressive options, using different percentages of identifying a balanced fund does not impact the long-term risk measurement. We equally find that the risk-return relationships of investment options are not sensitive to the modelling framework, except for the crisis analysis, in which the Fama-French five-factor model provides greater sensitivity.     

Binary interest rate sensitivities of emerging market corporate bonds

We develop a framework to assess interest rate sensitivities of emerging market corporate debt. Our analysis, based on yield indexes, is applied to investment grade and high yield portfolios. We reach beyond correlation-based analyses of interest rate sensitivity and keep our scope centered at capital gains of emerging market corporates and U.S. government bonds portfolios. Our empirical analysis spans over the period 2002–2015. We address interest rate sensitivity of assets during the ignition, apogee, and the aftermath of the global financial crisis. Based on historical data series, we evidence that the emerging market corporate bonds exhibit two different regimes of sensitivity to interest rate changes. We observe switching from a positive sensitivity under the normal market conditions to a negative one during distressed phases of business cycles and provide economical explanations of such phenomena. We show that emerging market corporate bonds, which on average could appear rather insensitive to the interest rate risk, in fact, present binary interest rate sensitivities. This research sheds light on how financial institutions may approach interest rate risk management including the downside risk hedge. Our findings allow banks and financial institutions to optimize economic capital under Basel III regulatory capital rules.     

Financial Distress in Australian General Insurers

We develop and test a statistical model to identify Australian general insurers experiencing financial distress over the 1999–2001 period. Using a logit model and two measures of financial distress we are able to predict, with reasonable confidence, the insurers more likely to be distressed. They are generally small and have low return on assets and cession ratios. Relative to holdings of liquid assets they have high levels of property and reinsurance assets, and low levels of equity holdings. They also write more overseas business, and less motor insurance and long‐tailed insurance lines, relative to fire and household insurance.