The effects of news events on market contagion: Evidence from the 2007–2009 financial crisis

In this paper, we use the quantile regression technique along with coexceedance, a contagion measure, to assess the extent to which news events contribute to contagion in the stock markets during the crisis period between 2007 and 2009. Studies have shown that, not only the subprime crisis leads to a global recession, but the effects on the global stock markets have also been significant. We track the news events, both in the UK and the US, using the global recession timeline. We observe that the news events related to ad hoc bailouts of individual banks from the UK have a contagion effect throughout the period for most of the countries under investigation. This, however, is not found to be the case for the news events originating from the US. Our findings regarding the evidence of contagion effects in the UK reinforce the argument that spreads and contagion—an outcome of the risk perception of financial markets—are solely a result of the behaviour of investors or other financial market participants.     

The 2008 global financial crisis and COVID-19 pandemic: How safe are the safe haven assets?

We compare the performance of safe-haven assets during the Global Financial Crisis (GFC) and COVID-19 pandemic. First, regarding the GFC, we find, intermediate (weak) safe haven evidence for US dollar, Swiss franc and T-bonds (Gold, Silver and T-bills). Second, with regard to COVID, we find gold is very risky in some settings, while silver has become extremely risky. Collectively, our findings suggest that the character of safe-haven assets has changed between the crises. Therefore, investors should exercise extreme care when investing in potential safe-haven assets during times of market stress.     

The cost of firms’ debt financing and the global financial crisis

We provide an assessment of the determinants of the risk premium paid by non-financial corporations on long-term bonds. By looking at 5500 issues over the period 2005–2012, we find that in recent years the sovereign debt market turbulence has been a major driver of corporate risk. Compared with the three-year period 2005–2007 before the global financial crisis, in the years 2010–2012 Italian, Spanish and Portuguese firms paid on average between 70 and 120 basis points of additional premium due to the negative spillovers from the sovereign debt crisis, while German firms received a discount of 40 basis points.     

The role of accounting in bank regulation on the eve of japan’s financial crisis: a failure of the new capital adequacy regulation

In contrast to previous examinations of the role of accounting in financial crises, this paper explores the way in which accounting has been woven into a new system of banking regulations. Although the regulatory reform of the mid-1980s was intended to maintain the soundness of banking businesses, it failed to prevent banks from excessive asset expansion in the latter half of the 1980s in Japan. One of the major causes of this regulatory failure is found in the way that the regulatory capital is defined for the new capital adequacy regulation. The latent revaluation reserves are partially counted as capital. Japanese domestic regulatory reform took place in the wider context of the international standardization of capital adequacy regulations (BIS standards). Japanese regulators utilized taken-for-granted practices of accounting to creatively comply with the BIS standards.     

Global financial crisis, extreme interdependences, and contagion effects: The role of economic structure?

The paper examines the extent of the current global crisis and the contagion effects it induces by conducting an empirical investigation of the extreme financial interdependences of some selected emerging markets with the US. Several copula functions that provide the necessary flexibility to capture the dynamic patterns of fat tail as well as linear and nonlinear interdependences are used to model the degree of cross-market linkages. Using daily return data from Brazil, Russia, India, China (BRIC) and the US, our empirical results show strong evidence of time-varying dependence between each of the BRIC markets and the US markets, but the dependency is stronger for commodity-price dependent markets than for finished-product export-oriented markets. We also observe high levels of dependence persistence for all market pairs during both bullish and bearish markets.     

What went wrong? The Puerto Rican debt crisis,the “Treasury Put,” and the failure of market discipline

What went wrong? Why did seemingly rational, forward-looking bond investors continue to purchase Puerto Rican debt with only a modest risk premium? Why did financial markets fail to exercise market discipline and restrict capital flows to Puerto Rico?This paper examines the hypothesis that investors believed Puerto Rican debt was implicitly insured by the U.S. government by studying a rare situation where this “Treasury Put” was extinguished. The expectation of a federal bailout was perfectly reasonable given past behavior by the federal government. Evaluating the Treasury Put hypothesis with a minimal set of assumptions is possible given three unique features of the economic environment. The key feature is an exogenous “seismic shock” – the non-bailout of the city of Detroit in 2013 that effectively extinguished the Treasury Put, estimated in this paper as 350 basis points. Institutional reforms that would eliminate the Treasury Put are considered, but none are found satisfactory. How to extinguish the Treasury Put on an ongoing basis in a democratic society remains an open question.     

Russia–Ukraine crisis: The effects on the European stock market

We examine the effect of the Russia–Ukraine crisis on the European stock markets. Because of increased political uncertainty, geographic proximity and the ramifications of the fresh sanctions imposed on Russia, the European stock markets tended to react negatively to this crisis. We find that on 21 February 2022, when Russia recognized two Ukrainian states as autonomous regions, European stocks incurred a significant negative abnormal return. Moreover, the negative stock price reactions continued in the post-event period. The magnitude of the stock price reactions to this crisis exhibits considerable variation across industries, countries and size of the company.     

Explicit deposit insurance design: International effects on bank lending during the global financial crisis✰

Studies find that during the 2007–2009 global financial crisis, loan spreads rose and corporate lending tightened, especially for foreign borrowers (a flight-home effect). We find that banks in countries with explicit deposit insurance (DI) made smaller reductions in total lending and foreign lending, experienced smaller increases in loan spreads, and had quicker post-crisis recoveries. These effects are more pronounced for banks heavily relying on deposit funding. Evidence also reveals that more generous or credible DI design is associated with a stronger stabilization effect on bank lending during the crisis, confirmed by the difference-in-differences analysis based on expansion of DI coverage during the crisis. The stabilization effect is robust to the use of country-specific crisis measures and control of temporary government guarantees.     

A multivariate analysis of the determinants of Moody’s bank financial strength ratings

In 1995 Moody’s Investors Services inaugurated a new rating service, bank financial strength ratings (BFSRs), that assesses the safety and soundness of banks in over 50 countries. Our study sets out to do some preliminary investigations of this new type of credit rating. We develop logistic regression models to help explain or predict BFSRs. Using bank-specific accounting and financial data we are able to correctly classify or predict BFSRs. These fundamental variables cover the dimensions of risk, loan provision ratios, and profitability. Of the three, loan provisions is the most important factor, followed by risk, and then profitability. Country risk ratings do not appear to be significant explanators of BFSRs. We also find that traditional debt ratings accurately classify BFSRs and this raises the question of whether BFSRs add incremental information. The paper also highlights future directions for our research. One such area is to examine how well BFSRs predict banking crises such as the credit problems currently affecting Asia and Latin America.     

The impact of intangibles on firms’ financial and market performance: UK evidence

This study provides empirical evidence about the effect of intangible assets on firms’ current and future financial and market performance by utilizing a sample the UK FTSE 150 nonfinancial companies. Generally, the findings of this examination reported a strong evidence on the role of intangibles in boosting firms’ performance. In particular, the results indicate that while goodwill (GW) does have a statistically positive effect on firms’ current and future performance, research and development (R&D) is only associated with firms’ future performance. The results of the current research is consistent with the market-based and resources-based theories which posits that intangible investments are the main driving factors of wealth creation in the long-run; Specifically, R&D operations can create new technologies and products that would enhance firms’ performance and value. In addition, the results reveal that both GW and R&D can explain variations in firms’ financial performance measures suggesting that such investments can enhance firms’ earning leading to capitalization such earnings in the market value. Finally, the results of this research provide practical implication for policy makers and managers.     

Repoliticalization of accounting standard setting—The IASB,the EU and the global financial crisis

Since its inception, the IASB has been able to set standards with relatively little political influence in its governance or standard setting process. But this changed with the outbreak of the global financial crisis. Political bodies began to view accounting standards as a contributing factor that amplified the consequences of the crisis on banks, financial markets and the overall economy. Regaining control over accounting standard setting was seen as imperative. In this article, we investigate how the EU sought to gain control over the IASB and how the global standard setter responded to limit political influence. Our findings show that a re-balancing of power in favor of political interests has occurred between the stakeholders of international accounting standard setting. Further research in this area looks promising. We suspect that the heightened influence of political actors may lead to further power struggles and efforts to cope with on-going changes in the institutional environment.     

The microstructure of fear,the Fama–French factors and the global financial crisis of 2007 and 2008

We analyze minute by minute equity price data from 1 August 2005 to 31 October 2008 to study the relationship between the three sources of systematic risk in Fama and French's (1993) model and the market's expectation of total risk as represented by the VIX (the “fear factor”). Our findings confirm the predicted relationship between the equity risk-premium and risk (Merton, 1980). We find that the size-premium is driven by investors who are flying-to-quality (Abel, 1988; Barsky, 1989). We also find that investors became increasingly sensitive to changes in the VIX during the global financial crisis.     

Does the equity premium puzzle persist during financial crisis? The case of the French equity market

This paper examines the effects of the financial crisis that began in 2008 on the equity premium of 6 French sector indices. Since the systematic risk coefficient beta remains the most common explanatory element of risk premium in most asset pricing models, we investigate the impact of the crisis on the time-varying beta of the six sector indices cited. We selected daily data from January 2003 to December 2012 and we applied the bivariate MA-GARCH model (BEKK) to estimate time-varying betas for the sector indices. The crisis was marked by increased volatility of the sector indices and the market. This rise in volatility led to an increase in the systematic risk coefficient during the crisis and first post-crisis period for all the major indices. The results are intuitive and corroborate findings in the empirical literature. The increase of the time-varying beta is considered by investors as an additional risk. Therefore, as expected, investors tend to increase their equity premiums to b ear the impact of financial crisis.     

The historic oil price fluctuation during the Covid-19 pandemic: What are the causes?

On 20 April 2020, the West Texas Intermediate (WTI) crude oil price dropped to negative levels for the first time in history. This study examines the factors underlying the historic oil price fluctuation during the Covid-19 pandemic. The autoregressive distributed lag (ARDL) bounds testing approach incorporating a structural break is applied to the daily series from 17 January to 14 September 2020 to analyze long-run relationships and short-run dynamics. The results reveal that increases in Covid-19 pandemic cases, US economic policy uncertainty, and expected stock market volatility contributed to the fall in the WTI crude oil price, whereas the fall in the global stock markets appears to significantly reduce the fall. Furthermore, the Russia–Saudi Arabia oil price war and speculation on oil futures are shown to play a critical part in the collapse of the oil markets. The findings are consistent with our expectations. Although it is reasonable to assume that the solution to this oil crisis is a pick-up in global oil demand, which will occur only when the novel coronavirus is defeated, this study proposes policy recommendations to cope with the current oil price crash.     

Are safe haven assets really safe during the 2008 global financial crisis and COVID-19 pandemic?

This study evaluates the safe-haven role of twelve assets against the US stock market during the 2008 global financial crisis (GFC) and the COVID-19 pandemic. Our results show that silver and the Islamic stock index were safe havens during the 2008 GFC, and the Islamic stock index and Tether have been safe havens during COVID-19. We observe that the Islamic stock index and Tether have emerged as strong new safe havens. However, our supplementary analysis reveals that gold and Bitcoin still exhibit safe-haven behavior during severe market downturns. Overall, our findings suggest that safe-haven assets may vary over time.     

Stock market liquidity and macro-liquidity shocks: Evidence from the 2007–2009 financial crisis

We develop an empirical framework that links micro-liquidity, macro-liquidity and stock prices. We provide evidence of a strong link between macro-liquidity shocks and the returns of UK stock portfolios constructed on the basis of micro-liquidity measures between 1999 and 2012. Specifically, macro-liquidity shocks, which are extracted on the meeting days of the Bank of England Monetary Policy Committee (MPC) relative to market expectations embedded in 3-month LIBOR futures prices, are transmitted in a differential manner to the cross-section of liquidity-sorted portfolios, with liquid stocks playing the most active role. We also find that there is a significant increase in shares' trading activity and a rather small increase in their trading cost on MPC meeting days. Finally, our results emphatically document that during the recent financial crisis the shocks–returns relationship has reversed its sign. Interest rate cuts during the crisis were perceived by market participants as a signal of deteriorating economic prospects and reinforced “flight to safety” trading.     

The evolution of the Federal Reserve’s Term Auction Facility and FDIC-insured bank utilization

The Term Auction Facility (TAF) was designed by the Federal Reserve during the financial crisis to inject emergency short-term funds into banks, as a supplement to the lender of last resort discount window offerings. We describe how the Federal Reserve altered the design of the Term Auction Facility (TAF) over the course of the financial crisis and examine the utilization of this stand-alone facility. Most specifically we detail the impact of the greatly increased offering amounts in all auctions after October 2008, which resulted in the facility no longer auctioning scarcely available funds. We also document significantly different usage of the facility by FDIC-insured community and non-community banks, consistent with the notion of a two-tiered banking system in the U.S. Community banks were far less likely to use the facility than larger, non-community banks.     

The interplay of salesperson’s job performance and satisfaction in the financial services industry

Research has not yet provided conclusive confirmation or disconfirmation of any model that discusses the relationship between job satisfaction (JS) and job performance (JP). This article reviews the relationship in the financial services industry setting and examines in line with the precedents (perceived organizational support, role ambiguity, role conflict (RC), work-family conflict (WFC), emotional exhaustion (EE)) and the consequences (organizational commitment). Findings suggest that, in the financial services industry, JP causes JS and has a positive effect on organizational commitment. This study also finds that WFC serves as an antecedent to RC, EE and JS. Most importantly, the finding that WFC is significantly related to RC is new and thus needs to be confirmed in different industry settings.