On the Effect of Bank of Japan’s Outright Purchase on the JGB Yield Curve

This paper examines an impact of Bank of Japan (BOJ)’s outright purchase on the Japanese government bond (JGB) yield curve. Particularly, we develop a simple state space model, which incorporates new factors regarding the BOJ’s announcement for its outright purchase and the current market outstanding with standard level and spread factors. Based on the model with a filtering method, we also implement an empirical analysis with time series of the BOJ’s announcement records during 2014/10/22–2017/8/3 in the quantitative–qualitative easing period to estimate the sensitivities of interest rates against the changes in the market expectation for the net supply with each sector of JGB. We expect the current work provides a basis for considering quantitative effects on the term structure by BOJ’s policy changes such as termination or significant reduction of the BOJ’s outright purchase. For instance, our scenario analysis shows substantial increase in the 30 year yield with widening of 20–30 year spread.     

Does Competition Affect Bank Risk?

Although policymakers often discuss trade-offs between bank competition and stability, past research provides differing theoretical perspectives and empirical results on the impact of competition on risk. We employ a new approach for identifying exogenous changes in the competitive pressures facing individual banks and discover that an intensification of competition materially boosts bank risk. With respect to the mechanisms, we find that competition reduces banks’ profits, pricing power, and charter values and increases banks’ provision of nontraditional, riskier banking services and lending to riskier firms.     

How Much of Bank Credit Risk Is Sovereign Risk? Evidence from Europe

We examine European banks' exposures to systematic and country‐specific sovereign risk. We organize our investigation around a multifactor affine credit risk model estimated on credit default swap data of different maturities. During the 2008–15 period, about one third of banks' credit risk is sovereign. However, banks strongly differ both in the magnitude and type of their sovereign exposures. Measures of indirect exposures, such as bank size and return on equity, capture these cross‐sectional differences better than measures of direct exposures. Furthermore, the properties of the distress risk premiums turn out to be important to understand the effect of sovereign risk on bank funding costs.     

Latin American Cycles: Has Anything Changed After the Great Recession?

This paper analyzes the evolution of growth cycles and business cycles in Latin America from 1980 to 2013 by using monthly industrial production. Focusing on both synchronization and other cyclical features, we find evidence of significant cyclical links between the countries of the region, which seem to be highly integrated in this period. Notably, we find that the Great Recession did not lead to any significant impact on the preexisting Latin American cyclical linkages.     

How Has Takeover Competition Changed Over Time?

Since the boom in takeovers in the 1980s, research in both law and financial economics has debated the role of takeover impediments such as poison pills, staggered boards, and state antitakeover laws. Have these impediments entrenched target management to the detriment of shareholders? Or have they increased the bargaining power of target boards of directors and left shareholders, if not better off, then at least unharmed? In their study published recently in the Journal of Corporate Finance, the authors provide new answers to these questions with a detailed analysis of takeover competition during the period 1981 through 2014. Using a random sample of 388 completed and withdrawn deals from this 34‐year period, the authors begin by confirming the already well‐documented increase in the use of takeover impediments over time. They then report evidence that takeover competition has not declined during this period. First of all, takeover premiums—the average percentage over market paid by acquirers to consummate transactions—have remained steady over time. Second, and the most striking of the authors' findings, is that the corporate auction process has “gone underground” since the 1980s. Although we now see fewer hostile attempts and publicly reported takeover bidding contests, the amount of competition for targets has remained largely unchanged when one takes account of “private” as well as public auctions—that is, contests that, as the authors discovered, included unidentified bidders. The authors view such a fundamental change in the takeover auction process as a response to the widespread growth of takeover impediments. In this sense, as Bill Schwert commented years ago, “hostile takeovers are less about shirking target management than about the bargaining tactics of targets and bidders.” Or as the authors put it, “the greater bargaining power provided by state laws and other takeover impediments has changed the manner in which takeover auctions are conducted,” but without greatly affecting the goal of economic efficiency that such transactions are designed to help bring about.     

Does Interbank Borrowing Reduce Bank Risk?

In this paper we investigate whether banks that borrow from other banks have lower risk levels. We concentrate on a large sample of Central and Eastern European banks that allows us to explore the impact of interbank lending when exposures are long term and interbank borrowers are small banks. The results of the empirical analysis generally confirm the hypothesis that long-term interbank exposures result in lower risk of the borrowing banks.     

Business Cycle Synchronization of Turkey with the Eurozone and the United States: What Has Changed Since 2001?

Using wavelet methodology, we make a detailed spectral analysis of the business cycle synchronization of the Turkish economy with the eurozone and the United States. We take into account the dramatic change in the main economic indicators in the Turkish economy after the 2001 financial crisis. We find that the correlation of Turkish cycles with the cycles of the eurozone and the United States increased substantially after 2001. Moreover, the correlation of the Turkish cycles with the U.S. cycles is not lower than that with the euro cycles after 2001. Accordingly, analyzing the effect of international developments should not be confined to the trade channel. We submit that capital flows offer a reasonable explanation for the high correlation with the United States.     

Is the Risk of Bankruptcy a Systematic Risk?

Several studies suggest that a firm distress risk factor could be behind the size and the book-to-market effects. A natural proxy for firm distress is bankruptcy risk. If bankruptcy risk is systematic, one would expect a positive association between bankruptcy risk and subsequent realized returns. However, results demonstrate that bankruptcy risk is not rewarded by higher returns. Thus, a distress factor is unlikely to account for the size and book-to-market effects. Surprisingly, firms with high bankruptcy risk earn lower than average returns since 1980. A risk-based explanation cannot fully explain the anomalous evidence.     

What Asset Prices Should Be Targeted by a Central Bank?

This paper investigates the monetary policy design for restoring equilibrium determinacy. Our interests are whether a central bank should respond to asset price fluctuations, and if so, what asset prices should be targeted. We show that a monetary policy response to the price of a productive tangible asset (capital price) is helpful for equilibrium determinacy, while that to the price of an intangible asset that reflects a firm's profit (share prices) is a source of equilibrium indeterminacy. This result comes from the two assets' prices moving in opposite directions in response to a permanent increase in inflation.     

Does Branch Religiosity Influence Bank Risk‐Taking?

Using branch‐level data on public and private US banking institutions, we investigate the importance of branch religiosity in shaping bank risk‐taking behavior. Our results show robust evidence that branch religiosity is negatively related to bank risk‐taking. This effect persists after controlling for several bank‐level and county‐level variables that might correlate with religiosity. Moreover, this result is robust to controlling for headquarter religiosity, suggesting that the effect of branch religiosity is additive and not washed out by headquarter religiosity. Overall, our findings document that headquarter religiosity does not capture the full effect of religiosity on bank behavior, as claimed by previous research, but that the religiosity of the geographic area in which the bank operates significantly influences bank behavior.     

The Effects of the Sharing Economy: How Does Internet Finance Influence Commercial Bank Risk Preferences?

In this article, we provide an evidence on the effects of the sharing economy by studying internet finance. It aims to explore how internet finance affects the relationship between commercial bank risk preferences and monetary policy, and discusses whether this impact varies across heterogeneous banks. The results suggest that having a loose monetary policy encourages a preference for risk. In addition, internet finance alters the sensitivity of bank risk behavior to monetary policy. Internet finance has a heterogeneous influence, depending on a bank’s ownership (i.e., state or private) and size. At privately owned banks, internet finance has only a moderate impact on the bank risk-taking transmission channel of monetary policy, unlike the subsample of large banks.     

How Does Information Disclosure Affect Bank Systemic Risk in the Presence of a Deposit Insurance System?

ABSTRACT

This article establishes a dynamic game with incomplete information to theoretically analyze the influence mechanism of information disclosure on systemic risk in the presence of a deposit insurance system. To verify the mechanism, we use panel data on 247 global banks in 41 countries during the period 2006 to 2015 in an empirical analysis. Our article finds that a high degree of information disclosure can reduce deposit insurance premiums and weaken the negative incentive from a bailout by regulatory authorities. Moreover, the effect of deposit insurance on financial stability is not apparent, but the synergistic effect of deposit insurance and information disclosure reduces bank systemic risk. Furthermore, different deposit insurance designs affect bank behavior, so it is crucial for bank supervisors to create proper deposit insurance systems, which are helpful in strengthening market discipline and preventing moral hazard thus contributing to a stable financial environment. Therefore, under the deposit insurance system, regulatory authorities should strive to improve the standard of information disclosure to ensure systemic stability.     

Do Foreign Investors Encourage Value-Enhancing Corporate Risk Taking?

This paper examines whether foreign investors in Korea affect incentives for firms to take risks in corporate investment. The short-term focus of foreign investors encourages managers to engage in conservative investment behavior. On the other hand, foreign investors encourage managers to focus on long-term value rather than short-term returns as active participants in corporate governance. These competing views are examined by testing for the association between foreign ownership and variations in corporate cash flow, a proxy for the risk of chosen investments. Furthermore, we examine whether risk taking is positively associated with firm growth, which is a primary concern in debates regarding the myopic behaviors of foreign investors. The results show that firms with high foreign ownership are less likely to avoid risk taking—and that risk taking is, in turn, positively associated with firm growth, implying that foreign investors perform a monitoring function in encouraging value-enhancing risk taking.     

Has the euro affected the choice of invoicing currency?

We present a new approach to study empirically the effect of the introduction of the euro on the pattern of currency invoicing. Our approach uses a compositional multinomial logit model, in which currency choice is explained by both currency-specific and country-specific determinants. We use unique quarterly panel data on the invoicing of Norwegian imports from OECD countries for the 1996–2006 period. We find that eurozone countries have substantially increased their share of home currency invoicing after the introduction of the euro, whereas the home currency share of non-eurozone countries fell slightly. In addition, the euro as a vehicle currency has overtaken the role of the US dollar in Norwegian imports. The substantial rise in producer currency invoicing by eurozone countries is primarily caused by a drop in inflation volatility and can only to a small extent be explained by an unobserved euro effect.     

Should Asset Managers Hedge Their “Fees at Risk”?

Although the recent financial crisis afflicted all asset managers, the problem of general market exposure was in some respects worse for the long-only funds that rely almost completely on asset-based fees than for the “absolute return” and other kinds of hedge funds that also receive performance-based fees. While the revenue generated by performance-based fees is expected to be volatile, asset-based fees tend to be viewed as an “annuity” stream that involves little or no earnings risk. But, especially in the case of long-only funds, large shortfalls in asset fees were caused by the combination of significant redemptions and sharp reductions in assets under management that accompanied the plunge in asset prices. In this article, the author attempts to quantify the expected effect of market fluctuations on the asset fees and profitability of long-only asset managers. Having done so, he then argues that traditional long-only asset managers—managers whose only reason for being is their ability to generate above-market returns (or “alpha”) on a fairly consistent basis—routinely retain too much beta risk in their primarily asset-based fee structures. The author offers two main reasons for long-only asset managers to hedge beta risk: (1) it would reduce the need for fund management firms to hold liquid capital to ensure solvency and fund important projects during market downturns; (2) it would provide the firm's current and prospective clients with a clearer signal of whether its managers are succeeding in the firm's mission of generating alpha, as well as the possibility of more equity-like and cost-effective incentive compensation systems for those managers.     

Has the value of cash increased over time?

We document a dramatic increase in the market valuation of cash holdings of US firms from 1988 to 2013. The value of one dollar of cash has increased by $0.019 per year during the period, indicating that shareholders place more value on cash in recent years. We also find that the increasing trend in cash value is driven mainly by increases in institutional shareholdings and accounting conservatism. We further decompose cash change into cash flows from operation (CFO) and cash flows from investing and financing activities, and find that CFO is a significant driver of the increasing trend in cash value.     

Can We Prove a Bank Guilty of Creating Systemic Risk? A Minority Report

Because increasing a bank's capital requirement to improve the stability of the financial system imposes costs upon the bank, a regulator should ideally be able to prove beyond a reasonable doubt that banks classified as systemically risky really do create systemic risk before subjecting them to this capital punishment. Evaluating the performance of two leading systemic risk models, we show that estimation error alone prevents the reliable identification of the most systemically risky banks. We conclude that it will be a considerable challenge to develop a riskometer that is sound and reliable enough to provide an adequate foundation for macroprudential policy.     

Has the CDS market lowered the cost of corporate debt?

Many have claimed that credit default swaps (CDSs) have lowered the cost of debt financing to firms by creating new hedging opportunities and information for investors. This paper evaluates the impact that the onset of CDS trading has on the spreads that underlying firms pay to raise funding in the corporate bond and syndicated loan markets. Employing a range of methodologies, we fail to find evidence that the onset of CDS trading lowers the cost of debt financing for the average borrower. Further, we uncover economically significant adverse effects on risky and informationally opaque firms.