New Economics Papers
on Banking
Issue of 2010‒12‒18
twenty-six papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Leverage and risk in US commercial banking in the light of the current financial crisis By Nikolaos Papanikolaou; Christian Wolff
  2. Banks, Financial Markets and International Consumption Risk Sharing By Markus Leibrecht; Johann Scharler
  3. The governance of financial regulation: reform lessons from the recent crisis By Ross Levine
  4. The changing role of central banks By Charles Goodhart
  5. Regulatory impact assessment at the Bank of Italy By Francesco Cannata; Massimo Libertucci; Francesco Piersante; Mario Quagliariello
  6. Banking crises and the international monetary system in the Great Depression and now By Richhild Moessner; William A Allen
  7. The Performance of UK Securitized Subprime Mortgage Debt: ‘Idiosyncratic’ Behaviour or Mortgage Design? By Lanot, Gauthier; Leece, David
  8. The Global Financial Crisis of 2007-08: Is it Unprecedented? By Michael D. Bordo; John S. Landon-Lane
  9. Business cycle effects on portfolio credit risk: A simple FX Adjustment for a factor model By Sokolov, Yuri
  10. Lessons learned from the financial crisis for financial stability and banking supervision By Alessio De Vincenzo; Maria Alessandra Freni; Andrea Generale; Sergio Nicoletti Altimari; Mario Quagliariello
  11. An efficient Peak-over-Threshold implementation for operational risk capital computation. By Dominique Guegan; Bertrand Hassani; Cédric Naud
  12. Market Strucutre, Screening Activity and Bank Lending Behavior By Nikolaos Papanikolaou
  13. Local Versus Aggregate Lending Channels: The Effects Of Securitization On Corporate Credit Supply In Spain By Gabriel Jiménez; Atif R. Mian; José-Luis Peydró; Jesús Saurina
  14. Liquidity Stress-Tester: Do Basel III and Unconventional Monetary Policy Work? By Jan Willem van den End
  15. Post-crisis bank liquidity risk management disclosure By Simplice A., Asongu
  16. Adverse Selection, Liquidity, and Market Breakdown By Koralai Kirabaeva
  17. Backtesting Value-at-Risk Models: A Multivariate Approach By Cristina Danciulescu
  18. The tax burden on the banking sector: some methodological issues and assessments By Giacomo Ricotti; Vittorio Pinelli; Giovanni Santini; Laura Santuz; Ernesto Zangari; Stefania Zotteri
  19. Bank regulations and income inequality: Empirical evidence By Manthos, Delis; Iftekhar , Hasan; Pantelis, Kazakis
  20. Contingent Capital: The Case for COERCs By Christian Wolff; Theo Vermaelen; George Pennacchi
  21. Central banks and competition authorities: institutional comparisons and new concerns By John Vickers
  22. The impact of CDS trading on the bond market: evidence from Asia By Ilhyock Shim; Haibin Zhu
  23. Are all Credit Default Swap Databases Equal? By Sergio Mayordomo; Juan Ignacio Peña; Eduardo S. Schwartz
  24. Global Diffusion of the Non-Traditional Banking Model and Alliance Networks: Social Exposure, Learning and Moderating Regulatory Effort By Cuntz, A.N.; Blind, K.
  25. Macroeconomics of Microfinance: How Do the Channels Work? By Nargiza Maksudova
  26. Backtesting Portfolio Value-at-Risk with Estimated Portfolio Weights By Pei Pei

  1. By: Nikolaos Papanikolaou (Luxembourg School of Finance, University of Luxembourg); Christian Wolff (Luxembourg School of Finance, University of Luxembourg)
    Abstract: In this paper we study the relationship between leverage and risk in commercial banking market. We employ a panel data set that consists of the biggest US commercial banks and which extends from 2002 to 2010 thus covering both the years before the outbreak of the current financial crisis as well as those followed. We make clear distinctions among different leverage types like on- and off-balance sheet leverage as well as short- and long-term leverage, which have never been made in the relevant literature. Our findings provide evidence that excessive leverage, both explicit and hidden off-the-balance sheet, rendered large banks vulnerable to financial shocks thus contributing to the fragility of the whole banking industry. In a similar vein, a direct link between short- and long-term leverage with risk is reported before the crisis, showing that leverage has been one of the key factors responsible for the serious liquidity shortages that were revealed after 2007 when the crisis erupted. We also demonstrate that banks which concentrate on traditional banking activities typically carry less risk exposure than those that are involved with modern financial instruments. Overall, our results provide a better understanding of the role of leverage in destabilizing the whole system whereas at the same time contribute to the current discussion on the resilience of the banking sector through the strengthening of the existing regulatory framework.
    Keywords: financial crisis; risk; leverage; commercial banking
    JEL: C23 D02 G21 G28
    Date: 2010
  2. By: Markus Leibrecht; Johann Scharler
    Abstract: In this paper we empirically explore how characteristics of the domestic financial system in uence the international allocation of consumption risk using a sample of OECD countries. Our results show that the extent of risk sharing achieved does not depend on the overall development of the domestic financial system per se. Rather, it depends on how the financial system is organized. Speciffcally, we find that coun- tries characterized by developed financial markets are less exposed to idiosyncratic risk, whereas the development of the banking sector contributes little to the inter- national diversification of consumption risk.
    Keywords: International Risk Sharing, Financial Development, Financial System
    JEL: F36 F41
    Date: 2010–12
  3. By: Ross Levine
    Abstract: There was a systemic failure of financial regulation: senior policymakers repeatedly enacted and implemented policies that destabilised the global financial system. They maintained these policies even as they learned of the consequences of their policies during the decade before the crisis. The crisis does not primarily reflect an absence of regulatory power, unclear lines of regulatory authority, capital account imbalances, or a lack of information by regulators. Rather, it represents the unwillingness of the policy apparatus to adapt to a dynamic, innovating financial system. A new institution is proposed to improve the design, implementation and modification of financial regulations.
    Keywords: financial institutions, regulation, policy, financial crisis
    Date: 2010–12
  4. By: Charles Goodhart
    Abstract: Although Central Banks have pursued the same objectives throughout their existence, primarily price and financial stability, the interpretation of their role in doing so has varied. We identify three stable epochs, when such interpretations had stabilised, ie 1. The Victorian era, 1840s to 1914; 2. The decades of government control, 1930s to 1960s; 3. The triumph of the markets, 1980s to 2007. Each epoch was followed by a confused inter-regnum, searching for a new consensual blueprint. The final such epoch concluded with a crisis, when it became apparent that macro-economic stability, the Great Moderation, plus (efficient) markets could not guarantee financial stability. So the search is now on for additional macro-prudential (counter-cyclical) instruments. The use of such instruments will need to be associated with controlled variations in systemic liquidity, and in the balance sheet of the Central Bank. Such control over its own balance sheet is the core, central function of any Central Bank, even more so than its role in setting short-term interest rates, which latter could be delegated. We end by surveying how relationships between Central Banks and governments may change over the next period.
    Keywords: central banks, financial stability, financial regulation, bank taxes
    Date: 2010–12
  5. By: Francesco Cannata (Banca d'Italia); Massimo Libertucci (Banca d'Italia); Francesco Piersante (Banca d'Italia); Mario Quagliariello (Banca d'Italia)
    Abstract: The far-reaching regulatory activity in which the financial sector has been involved in recent years has been attracting increased attention to the expected costs and benefits of such regulation; measures undertaken in response to the financial crisis have made these issues even more topical. Regulatory impact assessment (RIA) has become a widespread practice for the international institutions and for the regulators in the main developed countries. RIA has recently been adopted at the Bank of Italy, proving to be a useful tool not only to refine the rules being adopted, but also to strengthen the interaction with the public during the consultation phase. The publication of the RIA Guidelines provides a tool for codifying the process of the analysis; with the help of some exemplifications drawn from RIAs conducted so far, this document provides a key for the interpretation of the analyses and helps to clarify the underlying logical steps.
    Keywords: RIA, impact assessment, regulation, bank, public consultation
    JEL: G18 G28
    Date: 2010–12
  6. By: Richhild Moessner; William A Allen
    Abstract: We compare the banking crises in 2008-09 and in the Great Depression, and analyse differences in the policy response to the two crises in light of the prevailing international monetary systems. The scale of the 2008-09 banking crisis, as measured by falls in international short-term indebtedness and total bank deposits, was smaller than that of 1931. However, central bank liquidity provision was larger in 2008-09 than in 1931, when it had been constrained in many countries by the gold standard. Liquidity shortages destroyed the international monetary system in 1931. By contrast, central bank liquidity could be, and was, provided much more freely in the flexible exchange rate environment of 2008-9. The amount of liquidity provided was 5 ½ - 7 ½ times as much as in 1931. This forestalled a general loss of confidence in the banking system. Drawing on historical experience, central banks, led by the Federal Reserve, established swap facilities quickly and flexibly to provide international liquidity, in some cases setting no upper limit to the amount that could be borrowed.
    Keywords: banking crisis, international monetary system, Great Depression, central bank liquidity
    Date: 2010–12
  7. By: Lanot, Gauthier; Leece, David
    Abstract: The research estimates a competing risk model of mortgage terminations on a sample of UK securitized subprime mortgages. We consider whether the variety of mortgage contracts that were securitized explains the performance of subprime securities and their supposed ‘idiosyncratic’ behaviour. The methodological advance is the use of a general, flexible modelling of unobserved heterogeneity over several dimensions, controlling for both selection issues involving mortgage choice and dynamic selection over time. We conclude that securities consisting of subprime loans can be given meaningful valuations on bank balance sheets if the performance of the different types of loans can be better understood. JEL Codes: G21 C13 C25 C51 D10 D14 E44
    Keywords: Subprime mortgages; unobserved heterogeneity; loan performance; securitisation;
    JEL: G21
    Date: 2010–11–15
  8. By: Michael D. Bordo; John S. Landon-Lane
    Abstract: This paper compares the recent global crisis and recession to earlier international financial crises and recessions. Based on existing chronologies of banking, currency and debt crises we identify clusters of crises. We use an identification of extreme events and a weighting scheme based on real GDP relative to the U.S. to identify global financial crises since 1880. For banking crises we identify five global ones since 1880: 1890-91, 1907-08, 1913-14, 1931-32, 2007-2008. In terms of global incidence the recent crisis is fourth in ranking and comparable to 1907-08. We also calculate output losses during the recessions associated with global financial crises and again the recent crisis is similar in severity to 1907-08 and is fourth in ranking. On both dimensions the recent crisis is a pale shadow of the Great depression. The relatively mild experience of the recent crisis may reflect institutional and policy learning.
    JEL: E30 N20
    Date: 2010–12
  9. By: Sokolov, Yuri
    Abstract: The recent economic crisis on the demand side of the economy affects the trends and volatilities of the exchange rates as well as the operating conditions of borrowers in emerging market economies. But the exchange rate depreciation creates both winners and losers. With a weaker exchange rate, exporters and net holders of foreign assets will benefit, and vice verse, those relying on import and net debtors in foreign currency will be hurt. This paper presents a simple FX adjustment framework within Factor Endogenous Behaviour Aggregation (FEBA) approach* based on the decomposition of the competitiveness factor into components with meaningful behaviour content and subsequent collapsing into the Adjustment Index. The setup, while being simple, nicely captures non-linear and non-symmetric nature of the FX risk impact on bank’s credit portfolio and could be very useful for modeling credit risk. *The approach was set up in “Interaction between market and credit risk: Focus on the endogeneity of aggregate risk” and mentioned in Roubini Global Economic Digest as “Advance in Credit Risk Management”.
    Keywords: exchange rate, factor modeling, competitiveness, credit risk, market risk
    JEL: E30 G32 D01 E37 A10
    Date: 2010–12–05
  10. By: Alessio De Vincenzo (Banca d'Italia); Maria Alessandra Freni (Banca d'Italia); Andrea Generale (Banca d'Italia); Sergio Nicoletti Altimari (Banca d'Italia); Mario Quagliariello (Banca d'Italia)
    Abstract: The financial crisis that began in 2007 has revealed a need for a new supervisory and regulatory approach aimed at strengthening the system and containing the risk of future financial and economic disruptions. Three ingredients are needed to ensure financial stability: robust analysis, better regulation, and international cooperation. First, financial stability analysis must be improved to take full account of the different sources of systemic risk. Data coverage of the balance sheets of both non-bank financial institutions and the non-financial sectors should be increased. Moreover, to address the problems raised by the interconnections among financial institutions more granular and timely information on their exposures is needed. There must be further integration of macro- and micro-information and an upgrading of financial stability models. The second ingredient is the design of robust regulatory measures. Under the auspices of the G20 and the Financial Stability Board, the Basel Committee on Banking Supervision recently put forward substantial proposals on capital and liquidity. They will result in more robust capital base, lower leverage, less cyclical capital rules and better control of liquidity risk. Finally, the third ingredient is strong international cooperation. Ensuring more effective exchanges of information among supervisors in different jurisdictions and successful common actions is key in preserving financial integration, while avoiding negative cross-border spill-overs. Better resolution regimes are part of the efforts to ensure that the crisis of one institution does not impair the ability of the financial markets to provide essential services to the economy.
    Keywords: financial crisis, international cooperation, macroprudential analysis, procyclicality, prudential regulation, stress tests
    JEL: G18 G28
    Date: 2010–12
  11. By: Dominique Guegan (Centre d'Economie de la Sorbonne - Paris School of Economics); Bertrand Hassani (BPCE and Centre d'Economie de la Sorbonne); Cédric Naud (BPCE)
    Abstract: Operational risk quantification requires dealing with data sets which often present extreme values which have a tremendous impact on capital computations (VaR). In order to take into account these effects we use extreme value distributions to model the tail of the loss distribution function. We focus on the Generalized Pareto Distribution (GPD) and use an extension of the Peak-over-threshold method to estimate the threshold above which the GPD is fitted. This one will be approximated using a Bootstrap method and the EM algorithm is used to estimate the parameters of the distribution fitted below the threshold. We show the impact of the estimation procedure on the computation of the capital requirement - through the VaR - considering other estimation methods used in extreme value theory. Our work points also the importance of the building's choice of the information set by the regulators to compute the capital requirement and we exhibit some incoherence with the actual rules.
    Keywords: Operational risk, generalized Pareto distribution, Picklands estimate, Hill estimate, expectation maximization algorithm, Monte Carlo simulations, VaR.
    JEL: C1 C6
    Date: 2010–11
  12. By: Nikolaos Papanikolaou (Luxembourg School of Finance, University of Luxembourg)
    Abstract: In this paper we construct a theoretical model of spatial banking competition that considers the differential information among banks and potential borrowers in order to investigate how market structure affects the lending behavior of banks and their incentives to invest in screening technology. Consistent with the prevailing view in the relevant literature, our results reveal that competition reduces lending cost, which, in turn, encourages the entry of new customers in the loan market. Also, that the transportation cost that potential borrowers have to pay in order to reach the bank of their interest is decreased with the degree of competitiveness. Importantly, we demonstrate that market structure exerts a considerable positive effect on banks’ incentives to screen their loan applicants since banks are found to invest more in screening as competition in the market becomes higher. This is to say, banks resort to screening that serves as a buffer mechanism against bad credit which entails higher risk and which is more likely under competitive conditions. Overall, our findings provide support to a rather close link between the degree of competition, bank lending activity, and the investment of banks in screening technology.
    Keywords: banking; spatial competition; screening; credit risk
    JEL: G21 D41 D80
    Date: 2010
  13. By: Gabriel Jiménez; Atif R. Mian; José-Luis Peydró; Jesús Saurina
    Abstract: While banks may change their supply of credit due to bank balance sheet shocks (the local lending channel), firms can react by adjusting their sources of financing in equilibrium (the aggregate lending channel). We formalize a methodology for separately estimating these effects. We estimate the local and aggregate lending channel effects of the banks' ability to securitize real estate assets on non-real estate firms in Spain. We show that equilibrium dynamics nullify the strong local lending channel effect on credit quantity for firms with multiple banking relationships. However, credit terms for these firms become significantly more favorable due to securitization. Securitization also leads to an expansion in credit on the extensive margin towards first-time bank clients, and these borrowers are significantly more likely to end up in default. Finally, the 2008 collapse in securitization leads to a reversal in local lending channel.
    JEL: E44 G21
    Date: 2010–12
  14. By: Jan Willem van den End
    Abstract: This paper presents a macro stress-testing model for liquidity risks of banks, incorporating the proposed Basel III liquidity regulation, unconventional monetary policy and credit supply effects. First and second round (feedback) effects of shocks are simulated by a Monte Carlo approach. Banks react according to the Basel III standards, endogenising liquidity risk. The model shows how banks’ reactions interact with extended refinancing operations and asset purchases by the central bank. The results indicate that Basel III limits liquidity tail risk, in particular if it leads to a higher quality of liquid asset holdings. The flip side of increased bond holdings is that monetary policy conducted through asset purchases gets more influence on banks relative to refinancing operations.
    Keywords: banking; financial stability; stress-tests; liquidity risk
    JEL: C15 E44 G21 G32
    Date: 2010–12
  15. By: Simplice A., Asongu
    Abstract: Purpose – This work seeks to investigate what post crisis principles, banks have taken in a bid to manage liquidity risk. Its basis is founded on the ground that, the financial liquidity market was greatly affected during the recent economic turmoil and financial meltdown; when liquidity management disclosure was imperative for confidence building in depositors and shareholders. Design/methodology/approach – The study investigates Basel II pillar 3 disclosures on liquidity risk management in 20 of the top 33 world banks. Bank selection is based on available information, geographical balance and language permissibility. Information is searched from the World Wide Web; with a minimum of one hour allocated for ‘content search’; notwithstanding time spell for ‘content analysis’. When information on liquidity risk management is found, content scrutiny is guided by 16 disclosure principles; clubbed in four categories. Findings – Just 25% of sampled banks provide explicitly public accessible liquidity risk management information. This is a stark indication that, even in the post-crisis era, many top ranking banks do not still take seriously Basel disclosure norms; especially the February 2008 pre-crisis warning of the Basel Committee on Banking Supervision. Implications/limitations – Stakeholders of banks should easily have access to information on liquidity risk management. Banks falling short of this might not breed confidence in customers and shareholders in event of financial panic and turmoil. Like in the run-up to the previous financial crisis, if banks are not compelled to explicitly and expressly disclose what measures they adopt in a bid to guarantee stakeholder liquidity ; the onset of any financial shake-up would only precipitate a meltdown. The main limitation of this study is; the World Wide Web is used as the only source of information for bank stakeholders. Originality/value – The contribution of this paper to literature can be viewed from the role it plays in investigating what post-crisis measures banks have taken to inform stakeholders on how they manage liquidity risk. Paper type: Qualitative finance research paper.
    Keywords: Post crisis; Liquidity risk management; Bank
    JEL: G18 E50 G00 D80
    Date: 2010–12–07
  16. By: Koralai Kirabaeva
    Abstract: This paper studies the interaction between adverse selection, liquidity risk and beliefs about systemic risk in determining market liquidity, asset prices and welfare. Even a small amount of adverse selection in the asset market can lead to fire-sale pricing and possibly to a market breakdown if it is accompanied by a flight-to-liquidity, a misassessment of systemic risk, or uncertainty about asset values. The ability to trade based on private information improves welfare if adverse selection does not lead to a market breakdown. Informed trading allows financial institutions to reduce idiosyncratic risks, but it exacerbates their exposure to systemic risk. Further, I show that in a market equilibrium, financial institutions overinvest into risky illiquid assets (relative to the constrained efficient allocation), which creates systemic externalities. Also, I explore possible policy responses and discuss their effectiveness.
    Keywords: Financial institutions; Financial markets; Financial stability
    JEL: G11 D82
    Date: 2010
  17. By: Cristina Danciulescu (Indiana University - Bloomington)
    Abstract: The purpose of this paper is to develop a new and simple backtesting procedure that ex- tends the previous work into the multivariate framework. We propose to use the multivariate Portmanteau statistic of Ljung-Box type to jointly test for the absence of autocorrelations and cross-correlations in the vector of hits sequences for dierent positions, business lines or nancial institutions. Simulation exercises illustrate that this shift to a multivariate hits dimension delivers a test that increases signicantly the power of the traditional backtesting methods in capturing systemic risk: the building up of positive and signicant hits cross-correlations which translates into simultaneous realization of large losses at several business lines or banks. Our multivariate procedure is addressing also an operational risk issue. The proposed technique provides a simple solution to the Value-at-Risk(VaR) estimates aggregation problem: the institution's global VaR measure being either smaller or larger than the sum of individual trading lines' VaRs leading to the institution either under- or over- risk exposure by maintaining excessively high or low capital levels. An application using Prot and Loss and VaR data collected from two international major banks illustrates how our proposed testing approach performs in a realistic environment. Results from experiments we conducted using banks' data suggest that the proposed multivariate testing procedure is a more powerful tool in detecting systemic risk if it is combined with multivariate risk modeling i.e. if covariances are modeled in the VaR forecasts.
    Date: 2010–04
  18. By: Giacomo Ricotti (Banca d'Italia); Vittorio Pinelli (Banca d'Italia); Giovanni Santini (Banca d'Italia); Laura Santuz (Banca d'Italia); Ernesto Zangari (Banca d'Italia); Stefania Zotteri (Banca d'Italia)
    Abstract: The paper considers several approaches to the measurement of firms’ tax burden in order to identify significant indicators for the banking sector. It also analyses features of tax provisions which are peculiar to the Italian system. On these bases, it looks at measures affecting the tax burden on the Italian banking system over the period 2000-09. Inter alia, the analysis shows the role played by the rules for a firm’s tax base and for tax relief and considers the increasing importance of deferred tax assets. The comparison between the Italian banking sector and those of other countries, in relation to commercial banks, shows that over the period 1998-2008 all jurisdictions experienced a reduction in both effective and statutory tax rates. Even if the tax burden on Italian banks has seen one of the largest reductions, this tax indicator is still the highest among the countries considered.
    Keywords: tax burden, banks
    JEL: G21 H25 H87 K34
    Date: 2010–12
  19. By: Manthos, Delis; Iftekhar , Hasan; Pantelis, Kazakis
    Abstract: This paper provides cross-country evidence that variations in bank regulatory policies result in differences in income distribution. In particular, market discipline (private monitoring) and activity restrictions have an unambiguously positive and significant effect on income inequality and poverty, and this effect holds regardless of the level of economic and institutional development. In contrast, more stringent bank capital regulation and enhanced official supervisory power tend to reduce income inequality. However, this latter effect fades away for countries with low levels of economic and institutional development. We contend that these findings have new implications for the effects of bank regulations besides those related to their impact on financial stability.
    Keywords: Bank regulations; Income inequality; Cross-country panel data
    JEL: O15 O16 G28
    Date: 2010–12–01
  20. By: Christian Wolff (Luxembourg School of Finance, University of Luxembourg); Theo Vermaelen (INSEAD); George Pennacchi (University of Illinois at Urbana Champaign)
    Abstract: In this paper we propose a new security, the Call Option Enhanced Reverse Convertible (COERC). The security is a form of contingent capital, i.e. a bond that converts into equity when the market value of equity relative to debt falls below a certain trigger. The conversion price is set significantly below the trigger price and, at the same time, equity holders have the option to buy back the shares from the bondholders at the conversion price. Compared to other forms of contingent capital proposed in the literature, the COERC is less risky in a world where bank assets can experience sudden jumps. Moreover, the structure eliminates concerns about putting the company in a “death spiral” as a result of manipulation or panic. A bank that issues COERCs also has a smaller incentive to choose investments that are subject to large losses.
    Date: 2010
  21. By: John Vickers
    Abstract: The establishment of independent authorities for monetary policy and for competition policy was part of the institutional consensus of the Great Moderation. The paper contrasts how policy has operated in the two spheres, especially as regards the role of law. It then discusses the application of competition policy to banks before and during the crisis, and relationships between competition and financial stability. Finally, the paper considers whether the financial crisis - which has led, at least temporarily, to unorthodox and less independent monetary and competition policies - has undermined the long-term case for independence. The conclusion is that it has not. While regulation of the financial system clearly requires fundamental reform, sound money and markets free from threats to competition remain fundamental to long-run prosperity; those ends are best pursued by focused and independent monetary and competition policies.
    Keywords: central bank independence, monetary policy, competition law, merger policy, financial stability, banks
    Date: 2010–12
  22. By: Ilhyock Shim; Haibin Zhu
    Abstract: This paper investigates the impact of CDS trading on the development of the bond market in Asia. In general, CDS trading has lowered the cost of issuing bonds and enhanced the liquidity in the bond market. The positive impact is stronger for smaller firms, non-financial firms and those firms with higher liquidity in the CDS market. These empirical findings support the diversification and information hypotheses in the literature. Nevertheless, CDS trading has also introduced a new source of risk. There is strong evidence that, at the peak of the recent global financial crisis, those firms included in CDS indices faced higher bond yield spreads than those not included.
    Keywords: credit default swaps, bond spreads, bond liquidity, CDS index, Asia
    Date: 2010–12
  23. By: Sergio Mayordomo; Juan Ignacio Peña; Eduardo S. Schwartz
    Abstract: The presence of different prices in different databases for the same securities can impair the comparability of research efforts and seriously damage the management decisions based upon such research. In this study we compare the six major sources of corporate Credit Default Swap prices: GFI, Fenics, Reuters EOD, CMA, Markit and JP Morgan, using the most liquid single name 5-year CDS of the components of the leading market indexes, iTraxx (European firms) and CDX (US firms) for the period from 2004 to 2010. We find systematic differences between the data sets implying that deviations from the common trend among prices in the different databases are not purely random but are explained by idiosyncratic factors as well as liquidity, global risk and other trading factors. The lower is the amount of transaction prices available the higher is the deviation among databases. Our results suggest that the CMA database quotes lead the price discovery process in comparison with the quotes provided by other databases. Several robustness tests confirm these results.
    JEL: F33
    Date: 2010–12
  24. By: Cuntz, A.N.; Blind, K.
    Abstract: We analyze the impact of (alliance) network exposure on the speed and extent of adoption of the business model as being one explanatory factor for diffusion controlling for actor specific characteristics and embeddedness in the network. In order to explain how existing national regulation moderated this relationship and whether it succeeded in its risk-limiting mission by moderating global adoption patterns and risk-bearing behavior among financial institutions we estimate various history event analysis model i.e. standard Cox and extended frailty models. We find strong support for the role of network exposure rather than social learning, the impact of regulatory effort on patterns of adoption and the role of country clusters for diffusion in the financial sector.
    Keywords: diffusion;networks;alliances;banking;regulation;social learning;exposure
    Date: 2010–12–01
  25. By: Nargiza Maksudova
    Abstract: Recent changes in the microfinance landscape are characterized by increasing patterns of its integration with national financial systems and entry of commercial banks. Microfinance is no longer perceived as an isolated marginal sector of informal intermediation but rather constitutes particular lower-end segment of the broader financial system. Addressing the limited research on the interaction of microfinance with the broader economy I aim to reveal whether and how microfinance is transferred to growth through the identification of causality. I also consider the indirect impact of microfinance through its complement/substitute nature with mainstream banks. The empirical analysis is based on data from 1433 microfinance institutions pooled into 102 countries on which I perform a Granger-causality test using the Arellano and Bond (1991) methodology. The results indicate different transfer channels of microfinance to growth for middle and low-income countries, implying that the strength of the impact depends on the underlying level of development. The nature of microfinance interaction with commercial banks and money aggregates is of significant importance due to competition, spillover effects and (counter) cyclical influence, which hints at the potential of microfinance institutions to affect financial sector structure in the long-term.
    Keywords: microfinance; economic growth; financial intermediation; dynamic panel;
    JEL: G15 G21 O16 O57
    Date: 2010–10
  26. By: Pei Pei (Indiana University Bloomington)
    Abstract: This paper theoretically and empirically analyzes backtesting portfolio VaR with estimation risk in an intrinsically multivariate framework. For the first time in the literature, it takes into account the estimation of portfolio weights in forecasting portfolio VaR and its impact on backtesting. It shows that the estimation risk from estimating the portfolio weights as well as that from estimating the multivariate dynamic model of asset returns make the existing methods in a univariate framework inapplicable. And it proposes a general theory to quantify estimation risk applicable to the present problem and suggests practitioners a simple but effective way to carry out valid inference to overcome the effect of estimation risk in backtesting portfolio VaR. A simulation exercise illustrates our theoretical findings. In application, a portfolio of three stocks is considered.
    Date: 2010–11

This issue is ©2010 by Christian Calmès. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.