Do banks diversify portfolio risk? A test of the risk-cost hypothesis

Baltensperger, 1972a, Baltensperger, 1972b proposes the risk-cost hypothesis that banks decide the number of loans by considering the costs arising from diversifiable portfolio risk. Thus, the banks do not minimize operation costs, but total costs including risk costs. This paper examines empirically whether the risk-cost hypothesis is valid, using financial panel data from Japanese banks from 1981 to 1994. Estimating the first-order condition of total cost minimization together with an operation cost function, we find that the hypothesis is supported. Dividing the sample into different types of banks, it is found that the hypothesis is valid for city and regional banks, but not for second regional banks.     

Business connectedness or market risk? Evidence from financial institutions in China

We utilize the spectral representation of generalized forecast error variance decomposition to investigate the frequency dynamics of volatility connectedness and systemic risk of financial institutions in China from 2011 to 2018. We find that, first, high-frequency components account for the largest part of volatility connectedness (48.33%), followed by low-frequency components, and finally the medium-frequency components. Second, the low-frequency components reflect the business connectedness among financial institutions, while the high-frequency components capture the market risk. Third, the business connectedness among financial institutions will lead to a rise in overall connectedness as well as the accumulation of potential risks. Further, once a crisis breaks out, the potential risks have realized and the business connectedness among institutions declines; while market risk increases rapidly, which helps systemic financial risk stay at a high level. Lastly, among the financial sectors, the banking sector possesses a relatively higher level of business connectedness which plays an important role in the accumulation of potential financial risks; the securities sector features with higher market risk; while the insurance sector has both comparatively lower business connectedness and market risk.     

From financial repression to financial crisis? The case of China

This study explores the connections between financial repression policies and the possibility of financial crisis, a relationship that has been overlooked in previous literature. We focus on China, a country with one of the highest levels of financial repression in the world. China's case shows that when financial repression is maintained at a modest level, as the government did before 2008, the possibility of a financial crisis is low; however, when financial repression policies are pushed to an excessive level, as the government did after 2008, the national asset‐liability structure may be damaged to such an extent that a financial crisis becomes likely. The key to understanding the changing role of China's financial repression policies lies in the survival strategy of the Chinese party‐state, which regards finance as a powerful weapon and is eager to use it to address certain economic, political, or social problems that may endanger its rule.     

The relationship between revenue diversification and bank performance: Do financial structures and financial reforms matter?

This paper contributes to the existing literature by investigating the impact of revenue diversification on bank performance through a broad array of financial reforms, including credit controls, interest rate controls, entry barriers, banking supervision, privatization, and financial account restrictions. This analysis is the first to investigate whether financial structures (bank- or market-based systems) change the effect of diversification on individual bank performance. We use a panel dataset sample from 29 Asia-Pacific countries covering the period between 1995 and 2009, for a total of 2372 banks. Unlike the results of previous studies based on data from the U.S. and Europe, this study confirms the hypothesis of the portfolio diversification effect for the Asia-Pacific banking industry. For bank-based groups, bank performance can be improved through diversification, supporting the “bank-based view” hypothesis. Finally, under different financial systems, the relationships among revenue diversity, financial reforms, and bank performances are multidimensional.     

Do Chinese and Korean products compete in the Japanese market? An investigation of machinery exports

The purpose of this paper is to examine whether and to what extent Chinese and Korean products in the machinery industry compete with each other in the Japanese market. Empirical tests of panel data of 16 machinery products from 2000Q1 to 2012Q2 show that a decrease in the unit prices of Chinese exports leads to a decrease in the demand for Korean exports. In contrast, a decrease in the unit prices of Korean exports does not lead to a decrease in the demand for Chinese exports. In addition, lagged Chinese prices have bigger impacts on current Korean prices than lagged Korean prices on current Chinese prices. Simulation experiments investigating the impacts of a change in exchange rates on the Chinese and Korean export volumes also confirm that the Korean variables do not affect the Chinese export volume as much as the Chinese variables affect the Korean export volume. Overall, the findings in the present paper indicate that China has already emerged as a formidable competitor to Korea in the Japanese machinery market.     

Lessons from the global financial crisis – the case of Mainland China and Hong Kong

Abstract

The analysis of the intertwined reactions of Hong Kong and Mainland China to the 2008 Global Financial Crisis is considered in this study through the lenses of their stock markets. The GARCH-based analysis of stock market performance over the period December 2011–December 2014 shows that trade and equity sectors were the sectors most affected by the global recession; volatility was prevalent on the Shanghai stock market, whereas volatility persistence characterised the Hong Kong stock market. The results also show that the two stock markets recovered quite quickly. Tight controls applied by the financial authorities helped ensure some stability during the crisis.     

Do remittances moderate financial development–informality nexus in North Africa?

The prevalent informality and sheer size of international remittances characterize the North African countries. This study primarily aims at investigating how remittances moderate the effects of financial development on the informal economy in North African countries. Employing pool mean group (PMG)/panel ARDL approach and a balanced panel data set over the period 1980–2015, we find that remittances moderate the negative relationship between financial development and informal economy. This finding suggests that remittances bolster financial development, which, in turn, decreases the informal economy. Based on this result, we recommend that tailored policies and interventions are needed to promote financial development and international remittances in the North African region.     

What happened to the world's potential growth after the 2008–2009 global financial crisis?

This paper provides estimates of potential growth for 52 economies in 2000–2018. We follow Borio et al.’s (2014, 2017) methodology, which takes into account the relationship between financial factors and the output gap. We find that the world's potential growth declined from an average of 3.0% in 2000–2007 to 2.6% in 2010–2018. Potential growth peaked before the crisis at 3.4% in 2006. The trough was in 2009 at 2.3%. Potential growth started recovering in 2010 and reached 2.9% in 2018. Decomposing the 0.4 percentage points decline between 2000–2007 and 2010–2018 by economy, we find that high-income Europe contributed 0.34 percentage points. The decline in potential growth in the United States contributed 0.24 percentage points, while the decline in Japan contributed just 0.07 percentage points. China's potential growth and that of Asia and the Pacific also fell, but their contributions to the change in the world's potential growth were positive, 0.33 percentage points and 0.11 percentage points, respectively. The other economies contributed 0.19 percentage points to the decline. Decomposing the sources of the decline into the contributions of labor force growth and labor productivity growth, the former declined by 0.55 percentage points, while labor productivity growth increased by 0.15 percentage points.     

Do environmental regulations and financial constraints stimulate corporate technological innovation? Evidence from China

Does China achieve the Porter effect which states a win-win development of economy and environment? Besides environmental regulations (ER), financing is a critical factor affecting corporate technological innovation (TI). This study develops an integrated model to empirically investigate the interrelationship between ER, financial constraints (FC), and TI. The model is tested to make use of the Driscoll–Kraay standard error estimation and various regression models, based on detailed Chinese listed firm-level data covering the period from 2011 to 2017. Our baseline results show that ER have produced a crowding out effect of R&D input and inhibited patent outputs; as a consequence, the “weak” version of the Porter hypothesis is not underpinned in A-share stocks listed firms. Further tests indicate that FC have a mediating effect on the relationship between ER and TI. The moderating effect of FC between ER and TI is mixed. The effect of ER on TI is affected by the threshold effect of FC—the lower FC can better support the innovation compensation effect or alleviate the crowding out effect of ER. Thus, our findings offer new ideas for supporting financing mechanism of environmental governance to stimulate R&D innovation of listed companies.     

Do developing countries gain by participating in global value chains? Evidence from India

Review of World Economics - Is it in the interest of a developing country to promote strong local linkages for domestic industries or to participate in global value chains (GVCs) wherein linkages...     

Do regional trade agreements really help global value chains develop? evidence from Thailand

This paper examines the firm-level nexus between exporting and importing by using firm-level data from Thai customs. We differentiate firms’ imports according to the tariff regime used (e.g. regional trade agreements (RTAs)). Our finding is that imports under RTA regimes are not considerably associated with exports. Rather, greater exports are found in firms with larger imports under the most favoured nation or other preference regimes (e.g. duty drawback for raw materials imported to produce export products). One reason for the result in RTA imports is that active RTA importers mainly target the domestic market rather than the export market. If the main market is abroad, firms tend to use other preference regimes. Thus, the other preference regimes may contribute more greatly to the development of firm-level back-and-forth international transactions than RTAs do.     

Do E‐verify mandates improve labor market outcomes of low‐skilled native and legal immigrant workers?

We examine the impact of the 2007 Legal Arizona Workers Act (LAWA) on employment outcomes of low‐skilled legal workers. We use the synthetic control method to select a group of states against which the labor market trends of Arizona can be compared. Our results suggest that contrary to its intent, LAWA does not appear to have improved labor market outcomes of legal low‐skilled workers who compete with unauthorized immigrants, the target of the legislation. In fact, we find some evidence of diminished employment and increased unemployment among legal low‐skilled workers in Arizona. These findings are concentrated on the largest demographic group of workers—non‐Hispanic white men. While they are less likely to find employment, those who do have on average higher earnings as a result of LAWA. The pattern of results points to both labor supply and labor demand contractions due to LAWA, with labor supply dominating in terms of magnitude.     

How much does excess debt contribute to currency crises? the case of Korea

It is widely believed that seriously excess debt problems form a major cause of the 1997 Asian financial crisis. This paper investigates empirically the role of the debt problems using Korea’s won/US$ rate as the guinea pig. The problems are represented by two institutional variables in nonlinear equilibrium-correction models. The variables are found to exert positive feedback effects on Korea’s won rate returns in three forms: disequilibrium in levels, short-run shocks, and explosive bubbles. However, the estimated effects are not so singly conspicuous as to serve as the predictor of a likely collapse in the won rate in late 1997. Excess debt is hence found to only constitute one of the many factors that brought about the 1997 won crisis.     

What determines the success or failure of german bilateral financial aid?

This paper explores the causes of success or failure of German bilateral financial aid, using data on 1,003 Financial Cooperation (FC) projects and programs performed by the Kreditanstalt für Wiederaufbau (KfW). The authors find that the success or failure of financial aid loans disbursed under FC depends on project characteristics and macroeconomic conditions in the recipient country. Supervision time is also highly negatively correlated with the probability of success. While the relationship disappears once endogeneity is taken into account, the existence of an institutional bias toward a disproportionate allocation of supervision resources in unsuccessful projects cannot be rejected. These results show that some recent evidence on multilateral policybased aid holds also for the case of German bilateral project-based aid.     

Effects of financial reform on business entry in sub‐Saharan African countries: Do resource dependence and institutional quality matter?

This paper examined the effects of the financial liberalization strategy adopted on the African continent over 25 years ago in promoting new business entry using data from 22 sub‐Saharan African (SSA) countries in 2006–2017. Results from the dynamic generalized method of moments models show that: financial development via a policy of financial liberalization does not have a uniform effect on entrepreneurship; the interest rate gap significantly undermines the entrance of new firms; the ratio of broad money/gross domestic product (GDP) was positive and statistically significant while real interest rate had mixed findings; interactive effects of interest rate spread and real interest rate with regulatory quality was negative; the interaction of interest rate spread and real interest rate with natural resources confirms its destabilizing effect, although there was evidence suggesting that natural resources do not directly undermine entrepreneurship growth. Other results show real GDP and private credit have a significantly positive effect, and the cost of getting electricity significantly undermines entrepreneurship. The study calls for the need to deepen the financial sector though targeted reforms across SSA countries to reap its growth‐inducing effects on economic outcomes, while promoting institutional quality and efficient use of natural resources to achieve a non‐declining infusion of SMEs on the continent.     

Green luxury goods? The economics of eco-labels in the Japanese housing market

Using a unique transaction database of condominiums in the Tokyo metropolitan area and a hedonic analytical framework, we find that eco-labelled buildings command a small but significant premium on both the asking and transaction prices. This finding is consistent with results from other countries but in contrast to these studies, the present analysis also incorporates buyer characteristics which provide further information on the sources of demand for eco-labelled real estate. A separate estimation by subgroups reveals that the price premium is primarily driven by wealthier households that exhibit a higher willingness-to-pay for eco-labelled condominiums, both as a total amount and as a fraction of the total sales price. Less affluent households are also shown to pay higher prices for the eco label but the effect is less pronounced. The results indicate that capitalised utility bill savings are likely to account for a large proportion of the observed premium but the higher premium paid by affluent households suggests that more intangible benefits of living in a green building may also play a role.     

Are the actual and intended sources of financial knowledge the same? Evidence from Japan

The recent prolonged period of low economic growth and low interest rates in Japan demands that Japanese households invest in risky assets to accumulate sufficient retirement savings. In so doing, they acquire financial knowledge on these risky assets, typically from financial experts or salespersons in financial institutions. However, they may not necessarily be content with their current sources of financial knowledge because depending on their stage in the life cycle, they require different types of financial knowledge, usually from a variety of sources. Unfortunately, because of limitations in the data available, few studies have investigated whether the actual and intended sources of financial knowledge are the same. To address this research gap, this paper uses a Japanese household survey from 2010 to 2017, which provides unique information on the actual and intended sources of financial knowledge, and obtains two interesting results. First, a household’s actual sources of financial knowledge typically differ from its intended sources. More specifically, 33 % of households choosing financial institutions and experts and 52 % of households choosing financial institutions as their actual sources have a different intended source. Second, the discrepancy between actual and intended sources appears to relate to household demographic characteristics. Among those households choosing financial institutions and experts as their actual source of financial knowledge, 14 % choosing financial institutions as their intended source tend to have a lower level of financial knowledge and educational attainment. These results suggest that they have some difficulty understanding the advice of financial advisers. Among households choosing financial institutions as their actual source of financial knowledge, 26 % choosing financial institutions and experts as their intended source tend to have a larger amount of financial assets, better financial knowledge, and a preference for investing in risky assets; however, they also tend to be younger. This suggests they might want to obtain financial knowledge from financial experts to purchase risky financial assets as they age. While the study does not provide any causal evidence, the results suggest that understanding the reasons for any discrepancy in the actual and intended sources of financial knowledge may help financial institutions provide better services to these customers.     

Extending the determinants of currency substitution in Nigeria: Any role for financial innovation?

Existing literature suggests that macroeconomic and institutional factors are the drivers of currency substitution. The persistent and significant incidence of currency substitution during the period of mixed performance of macroeconomic variables suggests the existence of a knowledge gap on the drivers of currency substitution during the era of rapid technological innovation. To contribute to this literature, we augmented the traditional money demand model of the determinants of currency substitution to introduce financial innovation. We use Nigerian data from 2005Q1 to 2019Q4 and Pesaran et al. (2001, https://doi.org/10.1002/jae.616 ) autoregressive distributed lag (ARDL) bound test approach to cointegration to estimate the models. The results confirm the presence of short-run and long-run relationships between financial technology and currency substitution in Nigeria. In effect, the deployment of financial technology in developing payment system infrastructure creates additional incentives for economic agents to hold foreign currency deposit. Economic managers must, therefore, mainstream credible monetary and fiscal policies to moderate the effect of financial innovation on currency substitution.     

Do #AllLivesMatter? An Evaluation of Race and Excessive Use of Force by Police

There is anecdotal evidence showing that African-Americans are more likely to be subjected to excessive use of force by police than are people of other races. The counterargument is that these issues are not related to race and there are other factors at work. There have been several high-profile cases, such as those in Ferguson, Cleveland, and Baton Rouge. In this study, we estimate the effect of race on excessive use of force incidents using a new dataset comprising citizen complaints against the Chicago Police Department. Our findings show that not only does race play a role in excessive use of force complaints, but also that race plays a role in which complaints are sustained. Our study also highlights the importance of having data on which to perform rigorous empirical analysis in order to inform policymakers.     

The resurgence of currency mismatches: Emerging market economies are not out of the woods yet?

International Economics and Economic Policy - The emerging market economies (EMEs) are experiencing significant financial distress due to the rapid accumulation of foreign currency-denominated debt...