New Economics Papers
on Banking
Issue of 2011‒05‒30
29 papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Bank relationships, business cycles, and financial crisis By Galina Hale
  2. Credit to Private Sector, Interest Spread and Volatility in Credit-Flows: Do Bank Ownership and Deposits Matter? By Hamid Rashid
  3. The rise of shadow banking and the hidden benefits of diversification By Christian Calmès; Raymond Théoret
  4. Systemic risk contributions: a credit portfolio approach By Düllmann, Klaus; Puzanova, Natalia
  5. In search for yield? Survey-based evidence on bank risk taking By Buch, Claudia M.; Eickmeier, Sandra; Prieto, Esteban
  6. Bank capital regulation and structured finance By Antoine Martin; Bruno M. Parigi
  7. Banks as ‘fat cats’: Branching and Price Decisions in a Two-Stage Model of Competition By COCCORESE, Paolo
  8. On the mathematical form of CVA in Basel III. By Geurdes, Han / J. F.
  9. Economic Activity and Financial Institutional Risk: an empirical analysis for the Brazilian banking industry By Helder Ferreira de Mendonça; Delio Jose Cordeiro Galvao; Renato Falci Villela Loures
  10. How to make banks reveal their information By Michal Kowalik
  11. Macro Stress Testing of Credit Risk Focused on the Tails By Ricardo Schechtman; Wagner Piazza Gaglianone
  12. Mobile banking and financial inclusion : the regulatory lessons By Klein, Michael; Mayer, Colin
  13. Banking retail consumer finance data generator - credit scoring data repository By Karol Przanowski
  14. Mergers & Acquisitions in European Banking Higher productivity or better synergy among business lines? By Rym Ayadi; Jean-Philippe Boussemart; Hervé Leleu; Dhafer Saidane
  15. Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide By Christopher J. Mayer; Edward Morrison; Tomasz Piskorski; Arpit Gupta
  16. Forecasting Value-at-Risk Using Nonlinear Regression Quantiles and the Intra-day Range By Cathy W. S. Chen; Richard Gerlach; Bruce B. K. Hwang; Michael McAleer
  17. Venture capital in bank - and market - based economies By Adeline Saillard; Thomas Url
  18. Credit supply to personal bankruptcy filers: evidence from credit card mailings By Song Han; Benjamin J. Keys; Geng Li
  19. Fat-tailed models for risk estimation By Stoyanov, Stoyan V.; Rachev, Svetlozar T.; Racheva-Iotova, Boryana; Fabozzi, Frank J.
  20. How Do Business and Financial Cycles Interact? By Claessens, Stijn; Kose, Ayhan; Terrones, Marco E
  21. Structured Finance Influence on Financial Market Stability – Evaluation of Current Regulatory Developments By Sebastian A. Schuetz
  22. The simple econometrics of tail dependence By Maarten R.C. van Oordt; Chen Zhou
  23. Efficient, regression-based estimation of dynamic asset pricing models By Tobias Adrian; Richard K. Crump; Emanuel Moench
  24. Bank Bailouts, International Linkages and Cooperation By Friederike Niepmann; Tim Schmidt-Eisenlohr
  25. CVaR sensitivity with respect to tail thickness By Stoyanov, Stoyan V.; Rachev, Svetlozar T.; Fabozzi, Frank J.
  26. On mission drift in microfinance institutions By Armendáriz, Beatriz; Szafarz, Ariane
  27. Financially Fragile Households: Evidence and Implications By Annamaria Lusardi; Daniel J. Schneider; Peter Tufano
  28. Market risk premium used in 2010 by professors: A survey with 1,500 answers By Fernandez, Pablo; del Campo, Javier
  29. Private equity premium in a general equilibrium model of uninsurable investment risk By Francisco Covas; Shigeru Fujita

  1. By: Galina Hale
    Abstract: Recent literature argues that the structure of a banking network is important for its stability. We use network analysis to formally describe bank relationships in the global banking network between 1980 and 2009 and analyze the effects of recessions and banking crises on these relationships. We construct a novel data set that builds a bank-level global network from loan-level data on syndicated loans to financial institutions. Our network consists of 7938 banking institutions from 141 countries. We find that the network became more interconnected and more asymmetric, and therefore potentially more fragile, prior to 2008, and that its expansion slowed in recent years, dramatically so during the 2008-09 crisis. We use a stylized model to describe potential effects of banking crises and recessions on bank relationships. Empirically, we find that the structure of a global banking network is not invariant to banking crises nor to recessions, especially those in the United States. While recessions appear to encourage banks to make new connections, especially on the periphery of the network, the global financial crisis of 2008-09 made banks very cautious in their lending, meaning that almost no new connections were made during the crisis, particularly in 2009. We also find that during country-specific recessions or banking crises past relationships become more important as few new relationships are formed.
    Keywords: Banks and banking ; Financial crises
    Date: 2011
  2. By: Hamid Rashid
    Abstract: With bank-level data from 81 developing countries, the paper shows that increased foreign bank presence is associated with increased reliance on non-deposit based funding, which leads to higher interest rate spreads, less credit to the private sector, and higher volatility in bank loans. Foreign bank entry significantly reduces domestic banks’ share of deposits while foreign banks typically allocate less of their assets and deposits to lending. As domestic banks lose their deposit base, they rely on non-deposit based funding, but its higher costs and uncertainty force domestic banks to reduce their lending activities.
    Keywords: Financial development; foreign banks; deposits; financial regulation; central banks
    JEL: G20 G21 E58 G28
    Date: 2011–05
  3. By: Christian Calmès (Chaire d'information financière et organisationnelle ESG-UQAM, Laboratory for Research in Statistics and Probability, Université du Québec (Outaouais)); Raymond Théoret (Chaire d'information financière et organisationnelle ESG-UQAM, Université du Québec (Montréal), Université du Québec (Outaouais))
    Abstract: The diversification benefits associated with banks off-balance-sheet activities (OBS), and particularly non- traditional activities, is a question much debated in the literature. These activities, related to the emergence of shadow banking, greatly contribute to the volatility of bank operating revenues, but their impact on accounting returns is less clear (Stiroh and Rumble 2006). In this paper, we use a Canadian dataset to revisit the risk-return trade-off associated with banks OBS activities and study the evolution of the endo-geneity of banks decision to expand their market-oriented business lines. Consistent with the changing mix of noninterest income OBS activities generate, we identify a structural break in 1997 which coincides with an increased impact of endogeneity on banks returns, and which also leads to an increased return on assets (ROA) and a surge in banking risk. We trace the sources of the greater volatility of noninterest income to a tighter cointegrating relationship between noninterest income and stock market indices after 1997. Intro-ducing a new, robust estimation method based on a modification of the Hausman procedure, we find that neglecting endogeneity greatly underestimates the positive impact of shadow banking on bank accounting returns, even when the subprime crisis is considered. Our main results suggest that the influence of market-based activities on the risk-return trade-off might be larger than what was previously thought.
    Keywords: Noninterest income; Hausman test; Structural break; Shadow Banking; Endogeneity.
    JEL: C32 G20 G21
    Date: 2011–04–11
  4. By: Düllmann, Klaus; Puzanova, Natalia
    Abstract: We put forward a Merton-type multi-factor portfolio model for assessing banks' contributions to systemic risk. This model accounts for the major drivers of banks' systemic relevance: size, default risk and correlation of banks' assets as a proxy for interconnectedness. We measure systemic risk in terms of the portfolio expected shortfall (ES). Banks' (marginal) risk contributions are calculated based on partial derivatives of the ES in order to ensure a full risk allocation among institutions. We compare the performance of an importance sampling algorithm with a fast analytical approximation of the ES and the marginal risk contributions. Furthermore, we show empirically for a portfolio of large international banks how our approach could be implemented to compute bank-specific capital surcharges for systemic risk or stabilisation fees. We find that size alone is not a reliable proxy for the systemic importance of a bank in this framework. In order to smooth cyclical fluctuations of the risk measure, we explore a time-varying confidence level of the ES. --
    Keywords: systemic risk contributions,systemic capital charge,expected shortfall,importance sampling,granularity adjustment
    JEL: C15 C63 E58 G21
    Date: 2011
  5. By: Buch, Claudia M.; Eickmeier, Sandra; Prieto, Esteban
    Abstract: There is growing consensus that the conduct of monetary policy can have an impact on stability through the risk-taking incentives of banks. Falling interest rates might induce a 'search for yield' and generate incentives to invest into risky activities. This paper provides evidence on the link between monetary policy, commercial property prices, and bank risk taking. We use a factor-augmented vector autoregressive model (FAVAR) for the U.S. for the period 1997-2008. We include standard macroeconomic indicators and factors summarizing information provided in the Federal Reserve's Survey of Terms of Business Lending. These data allow modeling the reactions of banks' new lending volumes and prices as well as the riskiness of new loans. We do not find evidence for increased risk taking for the entire banking system after a monetary policy loosening or an unexpected increase in property prices. This masks, however, important differences across banking groups. Small domestic banks increase their exposure to risk, foreign banks lower risk, and large domestic banks do not change their risk exposure. --
    Keywords: FAVAR,bank risk taking,macro-finance linkages,monetary policy,commercial property prices
    JEL: E44 G21
    Date: 2011
  6. By: Antoine Martin; Bruno M. Parigi
    Abstract: We construct a model in which bank capital regulation and financial innovation interact. Innovation takes the form of pooling and tranching of assets and the creation of separate structures with different seniority, different risk, and different capital charges, a process that captures some stylized features of structured finance. Regulation is motivated by the divergence of private and social interests in future profits. Capital regulation lowers bank profits and may induce banks to innovate in order to evade the regulation itself. We show that structured finance can improve welfare in some cases. However, innovation may also be adopted to avoid regulation, even in cases where it decreases welfare.
    Keywords: Bank capital ; Bank reserves ; Banking law
    Date: 2011
  7. By: COCCORESE, Paolo (CELPE - Centre of Labour Economics and Economic Policy, University of Salerno - Italy)
    Abstract: In this paper we develop an empirical two-stage model of competition for the banking industry that incorporates the choice of capacity in the form of new branches. It is estimated using data on Italian banks for the years 1995-2009. The results show that the conduct of banks is significantly more competitive than a Bertrand-Nash equilibrium, and support the rejection of the simple one-stage specification, which underestimates the degree of competition. In the Fudenberg and Tirole (1984)’s taxonomy, banks are found to behave as ‘fat cats’, overinvesting in the branch network so as to keep prices high and accommodate entry.
    Keywords: bank branch network; competition; market structure; conduct
    JEL: G21 L10 L13
    Date: 2011–05–23
  8. By: Geurdes, Han / J. F.
    Abstract: Credit valuation adjustment in Basel III is studied from the perspective of the mathematics involved. A bank covers mark-to-market losses for expected counterparty risk with a CVA capital charge. The CVA is known as credit valuation adjustments. In this paper it will be argued that CVA and conditioned value at risk (CVaR) have a common mathematical ancestor. The question is raised why the Basel committee, from the perspective of CVaR, has selected a specific parameterization. It is argued that a fine-tuned supervision, on the longer run, will be beneficial for counterparties with a better control over their spread.
    Keywords: CVA; CVaR; statistical methodology.
    JEL: C02 A14 C01
    Date: 2011
  9. By: Helder Ferreira de Mendonça; Delio Jose Cordeiro Galvao; Renato Falci Villela Loures
    Abstract: This paper analyzes the impact of the changes in capital requirements on bank’s risk and the trade-off between economic activity and the risk of financial institutions in the Brazilian economy. Hence, an analysis based on dynamic panel data taking into account 73 banks and a vector autoregression analysis for the period from 2001 to 2008 is made. The findings underscore that banks which adopt riskier strategies reach higher profitability. Moreover, the results suggest that the banking regulation is an important instrument for reaching the balance between the economic growth and the low exposition to the risk of banking firms in markets such as the Brazilian one.
    Date: 2011–05
  10. By: Michal Kowalik
    Abstract: The paper derives optimal capital requirements, when the bank’s quality is private information. The supervisor can inspect the bank and punish the undercapitalized one with recapitalization and downsizing. The cost of bank’s capital and its ability to sell its assets are crucial for the bank’s incentive to reveal its quality truthfully. The paper provides following policy implications. First, sensitivity of capital requirements to the bank’s quality should be low in good times and high in bad times. Second, a leverage ratio should be accompanied by a requirement that the bank selling its assets retains part of them. Third, using results from supervisory inspection on the secondary market for the bank’s assets increases the bank’s incentive to misreport its quality. Fourth, implementation of the sensitive capital requirements cannot rely solely on information revealed on the market for the bank’s assets.
    Date: 2011
  11. By: Ricardo Schechtman; Wagner Piazza Gaglianone
    Abstract: This paper investigates macro stress testing of system-wide credit risk with special focus on the tails of the credit risk distributions conditional on bad macroeconomic scenarios. These tails determine the ex-post solvency probabilities derived from the scenarios. This paper estimates the macro-credit risk link by the traditional Wilson (1997) model as well as by an alternative proposed quantile regression (QR) method (Koenker and Xiao, 2002), in which the relative importance of the macro variables can vary along the credit risk distribution, conceptually incorporating uncertainty in default correlations. Stress-testing exercises on the Brazilian household sector at the one-quarter horizon indicate that unemployment rate distress produces the most harmful effect, whereas distressed inflation and distressed interest rate show higher impacts at longer periods. Determining which of the two stress-testing approaches perceives the scenarios more severely depends on the type of comparison employed. The QR approach is revealed more conservative based on a suggested comparison of vertical distances between the tails of the conditional and unconditional credit risk cumulative distributions.
    Date: 2011–05
  12. By: Klein, Michael; Mayer, Colin
    Abstract: Mobile banking is growing at a remarkable speed around the world. In the process it is creating considerable uncertainty about the appropriate regulatory response to this newly emerging service. This paper sets out a framework for considering the design of regulation of mobile banking. Since it lies at the interface between financial services and telecoms, mobile banking also raises competition policy and interoperability issues that are discussed in the paper. Finally, by unbundling payments services into its component parts, mobile banking provides important lessons for the design of financial regulation more generally in developed as well as developing economies.
    Keywords: Banks&Banking Reform,Access to Finance,Emerging Markets,Debt Markets,Technology Industry
    Date: 2011–05–01
  13. By: Karol Przanowski
    Abstract: This paper presents two cases of random banking data generators based on migration matrices and scoring rules. The banking data generator is a new hope in researches of finding the proving method of comparisons of various credit scoring techniques. There is analyzed the influence of one cyclic macro--economic variable on stability in the time account and client characteristics. Data are very useful for various analyses to understand in the better way the complexity of the banking processes and also for students and their researches. There are presented very interesting conclusions for crisis behavior, namely that if a crisis is impacted by many factors, both customer characteristics: application and behavioral; then there is very difficult to indicate these factors in the typical scoring analysis and the crisis is everywhere, in every kind of risk reports.
    Date: 2011–05
  14. By: Rym Ayadi (Centre for European Policy Studies (CEPS)); Jean-Philippe Boussemart (LEM-CNRS (UMR 8179), IESEG School of Management and University of Lille III); Hervé Leleu (CNRS-LEM (UMR 8179), IESEG School of Management); Dhafer Saidane (LSMRC/SKEMA and EQUIPPE, University of Lille III)
    Keywords: Efficiency, Free Aggregation Hull, Catching-up, Convergence, Mergers & Acquisitions, Banking Industry
    JEL: D24 G21 G34 L25
    Date: 2010–11
  15. By: Christopher J. Mayer; Edward Morrison; Tomasz Piskorski; Arpit Gupta
    Abstract: We investigate whether homeowners respond strategically to news of mortgage modification programs. We exploit plausibly exogenous variation in modification policy induced by U.S. state government lawsuits against Countrywide Financial Corporation, which agreed to offer modifications to seriously delinquent borrowers with subprime mortgages throughout the country. Using a difference-in-difference framework, we find that Countrywide’s relative delinquency rate increased thirteen percent per month immediately after the program’s announcement. The borrowers whose estimated default rates increased the most in response to the program were those who appear to have been the least likely to default otherwise, including those with substantial liquidity available through credit cards and relatively low combined loan-to-value ratios. These results suggest that strategic behavior should be an important consideration in designing mortgage modification programs.
    JEL: D10 G21 G33 K0
    Date: 2011–05
  16. By: Cathy W. S. Chen; Richard Gerlach; Bruce B. K. Hwang; Michael McAleer (University of Canterbury)
    Abstract: Value-at-Risk (VaR) is commonly used for financial risk measurement. It has recently become even more important, especially during the 2008-09 global financial crisis. We propose some novel nonlinear threshold conditional autoregressive VaR (CAViaR) models that incorporate intra-day price ranges. Model estimation and inference are performed using the Bayesian approach via the link with the Skewed-Laplace distribution. We examine how a range of risk models perform during the 2008-09 financial crisis, and evaluate how the crisis affects the performance of risk models via forecasting VaR. Empirical analysis is conducted on five Asia-Pacific Economic Cooperation stock market indices as well as two exchange rate series. We examine violation rates, back-testing criteria, market risk charges and quantile loss function values to measure and assess the forecasting performance of a variety of risk models. The proposed threshold CAViaR model, incorporating range information, is shown to forecast VaR more efficiently than other models, across the series considered, which should be useful for financial practitioners.
    Keywords: Value-at-Risk; CAViaR model; Skewed-Laplace distribution; intra-day range; backtesting; Markov chain Monte Carlo
    Date: 2011–05–18
  17. By: Adeline Saillard (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Thomas Url (WIFO - Austrian Institute of Economic Research)
    Abstract: The determinants of venture capital investment have attracted a significant amount of attention from both academics and policymakers. We use a version of the Keuschnigg-Nielsen model for venture-capital-financed projects to condition our analysis on a reasonable set of exogenous variables but we focus on one determinant : financial market structure. The type of financial market structure (bank -or market-based) contributes substantially to explaining differences among countries with respect to the extent of venture capital investments in the initial business stages. We will use the cross country and time series variation from a panel of 19 industrial countries to support the hypothesis that venture capital thrives within market-based financial systems and is confined to an ancillary role in bank-based systems.
    Keywords: Venture capital, financial market structure, local stock markets, panel data.
    Date: 2011–02
  18. By: Song Han; Benjamin J. Keys; Geng Li
    Abstract: Are consumers who have filed for personal bankruptcy before excluded from the unsecured credit market? Using a unique data set of credit card mailings, we directly explore the supply of unsecured credit to consumers with the most conspicuous default risk--those with a bankruptcy history. On average, over one-fifth of personal bankruptcy filers receive at least one offer in a given month, with the likelihood being even higher for those who filed for bankruptcy within the previous two years. However, offers to bankruptcy filers carry substantially less favorable terms than those to comparable consumers without a bankruptcy history, with higher interest rates, lower credit limits, a greater likelihood of having an annual fee, and a smaller likelihood of having rewards or promotions. In addition, our analysis of credit terms typically disclosed only in the fine print suggests that offers to filers tend to include more "hidden" costs.
    Date: 2011
  19. By: Stoyanov, Stoyan V.; Rachev, Svetlozar T.; Racheva-Iotova, Boryana; Fabozzi, Frank J.
    Abstract: In the post-crisis era, financial institutions seem to be more aware of the risks posed by extreme events. Even though there are attempts to adapt methodologies drawing from the vast academic literature on the topic, there is also skepticism that fat-tailed models are needed. In this paper, we address the common criticism and discuss three popular methods for extreme risk modeling based on full distribution modeling and and extreme value theory. --
    Date: 2011
  20. By: Claessens, Stijn; Kose, Ayhan; Terrones, Marco E
    Abstract: This paper analyzes the interactions between business and financial cycles using an extensive database of over 200 business and 700 financial cycles in 44 countries for the period 1960:1-2007:4. Our results suggest that there are strong linkages between different phases of business and financial cycles. In particular, recessions associated with financial disruption episodes, notably house price busts, tend to be longer and deeper than other recessions. Conversely, recoveries associated with rapid growth in credit and house prices tend to be stronger. These findings emphasize the importance of developments in credit and housing markets for the real economy.
    Keywords: asset busts; booms; credit crunches; financial crises; recessions; recoveries
    JEL: E32 E44 E51 F42
    Date: 2011–05
  21. By: Sebastian A. Schuetz (Lueneburg-Wolfsburg chamber of industry and commerce)
    Abstract: In 2007 the world faced one of the biggest financial crises ever. It was the third important financial crisis in the last 12 years. Spillovers to the real economy and moral hazard behaviour of carpetbaggers resulted in enormous pressure on worldwide political institutions to approve a more rigorous regulation on financial institutions and predict financial crises via early warning systems. We analyzed the performance of structured finance ratings and structured finance issuance/outstanding to detect the main shortcomings of the subprime crisis. Afterwards we explain the behaviour of market participants with theoretical models and a survey of institutions involved in securitization. With the conclusions of this analysis we evaluate the EU regulation on credit rating agencies and current Basel II enhancements. Finally we can determine that most regulatory enhancements are in accordance with our analyzed shortcomings. Some approaches like the introduction of a leverage ratio are counterproductive and a danger for worldwide economic growth.
    Keywords: structured finance, ratings, regulation, subprime crisis, Basel II, leverage ratio
    JEL: G21 G24 G28
    Date: 2010–06
  22. By: Maarten R.C. van Oordt; Chen Zhou
    Abstract: The aim of this paper is to show that measures on tail dependence can be estimated in a convenient way by regression analysis. This yields the same estimates as the non-parametric method within the multivariate Extreme Value Theory framework. The advantage of the regression approach is contained by its straightforward extension to the estimation of higher dimensional tail dependence. We provide an example on international stock markets. The regression approach to tail dependence can be applied to estimate several measures of systemic importance of financial institutions in the literature.
    Keywords: Tail dependence; Regression analysis; Extreme Value Theory; Systemic risk
    JEL: C14
    Date: 2011–05
  23. By: Tobias Adrian; Richard K. Crump; Emanuel Moench
    Abstract: We study regression-based estimators for beta representations of dynamic asset pricing models with affine and exponentially affine pricing kernel specifications. These estimators extend static cross-sectional asset pricing estimators to settings where prices of risk vary with observed state variables. We identify conditions under which four-stage regression-based estimators are efficient and also present alternative, closed-form linearized maximum likelihood (LML) estimators. We provide multi-stage standard errors necessary to conduct inference for asset pricing tests. In empirical applications, we find that time-varying prices of risk are pervasive, thus favoring dynamic cross-sectional asset pricing models over standard unconditional specifications.
    Keywords: Asset pricing ; Econometric models ; Risk ; Regression analysis
    Date: 2011
  24. By: Friederike Niepmann (European University Institute); Tim Schmidt-Eisenlohr (University of Oxford)
    Abstract: On the occasion of the 65th birthday of Governor Klaus Liebscher and in recognition of his commitment to Austria’s participation in European monetary union and to the cause of European integration, the Oesterreichische Nationalbank (OeNB) established a “Klaus Liebscher Award”. It has been offered annually since 2005 for up to two excellent scientific papers on European monetary union and European integration issues. The authors must be less than 35 years old and be citizens from EU member or EU candidate countries. Each “Klaus Liebscher Award” is worth EUR 10,000. The winning papers of the seventh Award 2011 were written by Friederike Niepmann and Tim Schmidt-Eisenlohr (shared award) and by Steffen Osterloh. Friederike Niepmann’s and Tim Schmidt-Eisenlohr’s paper is presented in this Working Paper while Steffen Osterloh’s contribution is contained in Working Paper 169 . In this paper Friederike Niepmann and Tim Schmidt-Eisenlohr start from the observation that financial institutions are increasingly linked internationally. As a result, financial crisis and government intervention have stronger effects beyond borders. The authors provide a model of international contagion allowing for bank bailouts. While a social planner trades off tax distortions, liquidation losses and intraand intercountry income inequality, in the non-cooperative game between governments there are inefficiencies due to externalities, no burden sharing and freeriding. The authors show that, in absence of cooperation, stronger interbank linkages make government interests diverge, whereas cross-border asset holdings tend to align them. The authors analyze different forms of cooperation and their effects on global and national welfare. JEL classification: F36, F42, G01, G28
    Keywords: bailout, contagion, financial crisis, international institutional arrangements
    Date: 2011–05–23
  25. By: Stoyanov, Stoyan V.; Rachev, Svetlozar T.; Fabozzi, Frank J.
    Abstract: We consider the sensitivity of conditional value-at-risk (CVaR) with respect to the tail index assuming regularly varying tails and exponential and faster-than-exponential tail decay for the return distribution. We compare it to the CVaR sensitivity with respect to the scale parameter for stable Paretian, the Student's t, and generalized Gaussian laws and discuss implications for the modeling of daily returns and marginal rebalancing decisions. Finally, we explore empirically the impact on the asymptotic variability of the CVaR estimator with daily returns which is a standard choice for the return frequency for risk estimation. --
    Keywords: fat-tailed distributions,regularly varying tails,conditional value-at-risk,marginal rebalancing,asymptotic variability
    Date: 2011
  26. By: Armendáriz, Beatriz; Szafarz, Ariane
    Abstract: This paper sheds light on a poorly understood phenomenon in microfinance which is often referred to as "mission drift": A tendency reviewd by numerous microfinance institutions to extend larger average loan sizes in the process of scaling-up. . We argue that this phenomenon is not driven by transaction cost minimization alone. Instead, poverty-oriented microfinance institutions could potentially deviate from their mission by extending larger loan sizes neither because of "progressive lending" nor because of "cross-subsidization" but because of the interplay between their own mission, the cost differentials between poor and unbanked wealthier clients, and region-specific clientele parameters. In a simple one-period framework we pin down the conditions under which mission drift can emerge. Our framework shows that there is a thin line between mission drift and cross-subsidization, which in turn makes it difficult for empirical researchers to establish whether a microfinance institution has deviated from its poverty-reduction mission. This paper also suggests that institutions operating in regions which host a relatively small number of very poor individuals might be misleadingly perceived as deviating from their social objectives. Because existing empirical studies cannot differentiate between mission drift and cross-subsidization, these studies can potentially mislead donors and socially responsible investors pertaining resource allocation across institutions offering financial services to the poor. The difficulty in separating cross-subsidization and mission drift is discussed in light of the contrasting experiences between microfinance institutions operating in Latin America and South Asia.
    Keywords: Microfinance; Loan Size; Mission Drift; Cross-subsidization
    JEL: O1 O16
    Date: 2011
  27. By: Annamaria Lusardi; Daniel J. Schneider; Peter Tufano
    Abstract: This paper examines households’ financial fragility by looking at their capacity to come up with $2,000 in 30 days. Using data from the 2009 TNS Global Economic Crisis survey, we document widespread financial weakness in the United States: Approximately one quarter of Americans report that they would certainly not be able to come up with such funds, and an additional 19% would do so by relying at least in part on pawning or selling possessions or taking payday loans. If we consider the respondents who report being certain or probably not able to cope with an ordinary financial shock of this size, we find that nearly half of Americans are financially fragile. While financial fragility is more severe among those with low educational attainment and no financial education, families with children, those who suffered large wealth losses, and those who are unemployed, a sizable fraction of seemingly “middle class” Americans also judge themselves to be financially fragile. We examine the coping methods people use to deal with shocks. While savings is used most often, relying on family and friends, using formal and alternative credit, increasing work hours, and selling items are also used frequently to deal with emergencies, especially for some subgroups. Household finance researchers must look beyond precautionary savings to understand how families cope with risk. We also find evidence of a “pecking order” of coping methods in which savings appears to be first in the ordering. Finally, the paper compares the levels of financial fragility and methods of coping among eight industrialized countries. While there are differences in coping ability across countries, there is general evidence of a consistent ordering of coping methods
    JEL: D14 D91
    Date: 2011–05
  28. By: Fernandez, Pablo (IESE Business School); del Campo, Javier (IESE Business School)
    Abstract: The average Market Risk Premium (MRP) used in 2010 by professors in the United States (6.0%) was higher than the one used by their colleagues in Europe (5.3%). We also report statistics for 33 countries: the average MRP used in 2010 ranges from 3.6% (Denmark) to 10.9% (Mexico). 29% of the professors decreased the MRP in 2010, 16% increased it and 55% used the same MRP. The dispersion of the MRP used was high: the average range of MRP used by professors for the same country was 7.4% and the average standard deviation was 2.4%. Most previous surveys have been interested in the Expected MRP, but this survey asks about the Required MRP. The paper also contains the references that professors use to justify their MRP, and comments from 85 professors that illustrate the various interpretations of what is the required MRP.
    Keywords: equity premium puzzle; required equity premium; expected equity premium; historical equity premium;
    JEL: G12 G31 M21
    Date: 2011–03–05
  29. By: Francisco Covas; Shigeru Fujita
    Abstract: This paper studies the quantitative properties of a general equilibrium model where a continuum of heterogeneous entrepreneurs are subject to aggregate as well as idiosyncratic risks in the presence of a borrowing constraint. The calibrated model matches the highly skewed wealth and income distributions of entrepreneurs. The authors provide an accurate solution to the model despite the significant nonlinearities that are absent in the economy with uninsurable labor income risk. The model is capable of generating the average private equity premium of roughly 3 percent and a low risk-free rate. The model also produces procyclicality of the risk-free rate and countercyclicality of the average private equity premium. The countercyclicality of the average equity premium is largely driven by tightening (loosening) of financing constraints during recessions (booms).
    Keywords: Risk ; Private equity ; Business cycles
    Date: 2011

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