The impact of off-balance-sheet activities on banks returns: An application of the ARCH-M to Canadian data

This paper revisits the impact of off-balance-sheet (OBS) activities on banks risk-return trade-off. Recent studies (e.g., Stiroh and Rumble, 2006) show that increasing OBS activities does not necessarily yield straightforward diversification benefits for banks. However, introducing a risk premium in the standard banks returns models, and resorting to an ARCH-M procedure, Canadian data suggest that banks risk-return trade-off displays a structural break around 1997. In the second subperiod of our sample (1997–2007), we find that the noninterest income generated by OBS activities no longer impacts banks returns negatively. While during the first period (1988–1996) the volatility variable is not significant in any returns equations, a risk premium eventually emerges, pricing the risk associated to OBS activities.     

PREDICTING PRIVATE COMPANY FAILURE

Private company failure is a significant problem that is not fully addressed by existing research. This study develops a discriminant model from data on 107 private companies. The model predicts success and failure, based on six ratios obtained from the two immediately prior years' publicly available accounting reports. Based on a hold-out sample of 40 companies a prediction with 85% accuracy was achieved. This prediction was made one year ahead. The model indicates that the retained earnings/total assets, total liabilities/total assets, and shareholders funds/total liabilities ratios are the three major predictors of bankruptcy. Overall the model's coefficients are, as expected, substantially different to those of public company models.     

The Relationship Between REITs Returns and Inflation: A Vector Error Correction Approach

Previous studies show that REITs returns and inflation arenegatively related. This paper reexamines this perverse inflation hedgephenomenon by investigating the relationship among REITs returns, realactivities, monetary policy and inflation through a Vector ErrorCorrection Model. Empirical results show that inflation does notGranger-cause REITs returns and that REITs returns signal changes in monetary policy. The observed negative relationship between REITs returnsand inflation is merely a proxy for the more fundamental relationshipbetween REITs returns and other macroeconomic variables.     

Adverse selection as an explanation of credit rationing and different lender types

An adverse selection model is utilized to demonstrate that informational asymmetry may make it wealth optimal for the financial intermediary (FI) to credit ration and to rationalize the existence of different lenders in the credit market. The crucial assumption is that borrowers differ in their tolerance for a lender-imposed default penalty, the severity of which also varies with the lender. The credit rationing portion proves that the FI will: 1) be forced by a binding regulatory constraint to overinvest in capital; 2) ration its worst risk class borrowers; 3) establish its optimal loan interest rate on the basis of the average quality of its loans and the interest rate elasticity of the borrower demand in its best risk category; and 4) decrease the total loan volume and increase the loan interest rate due to an increase in the capital requirement, but the effect on the default risk quality of its loan portfolio is ambiguous. The existence result is that if a lender has a high default penalty, he can charge a lower rate and attract only “good” borrowers, i.e., heterogeneous lender types encourage the screening of borrowers and vice versa.     

REIT Returns and Inflation: Perverse or Reverse Causality Effects?

Contrary to the Fisherian theory of interest, previous studies document a negative relationship between REIT (Real Estate Investment Trust) returns and inflation. In this research, we re-examine this perverse inflation behavior by testing for the causal relationships among REIT returns, real activity, monetary policy, and inflation through a vector error correction model. Our results indicate that the observations of REIT returns as perverse inflation hedges are spurious. The observed negative relationship between REIT returns and inflation is in fact a manifestation of the effects of changes in monetary policies. These findings are consistent with Darrat and Glascocks (1989) evidence of monetary effects on REIT returns.     

Environmental Conditions,Reservation Prices,and Time on the Market for Housing

A general analytical model to describe the impact of environmental disamenities on duration of sales is derived. A statistical technique to recover a sellers reservation price is proposed. An econometric procedure that consistently estimates market duration and a sellers reservation price is described. An application to the impact of highway noise on property values and market duration is presented. The estimation results show that, while highway noise has a significant negative impact on forming reservation prices and predicting sale prices, the noise effect on duration of sales is not statistically significant. Empirical evidence also shows a negative impact of market duration on reservation prices, which indicates an updating process for reservation prices over time.