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on Corporate Finance |
| By: | Chia-Lin Chang (Department of Applied Economics Department of Finance National Chung Hsing University Taichung, Taiwan.); Juan-Ángel Jiménez-Martín (Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa). Universidad Complutense de Madrid.); Esfandiar Maasoumi (Department of EconomicsEmory University, USA); Michael McAleer (Department of Quantitative Finance National Tsing Hua University, Taiwan); Teodosio Pérez-Amaral (Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa). Universidad Complutense de Madrid.) |
| Abstract: | The Basel Committee on Banking Supervision (BCBS) (2013) recently proposed shifting the quantitative risk metrics system from Value-at-Risk (VaR) to Expected Shortfall (ES). The BCBS (2013) noted that “a number of weaknesses have been identified with using VaR for determining regulatory capital requirements, including its inability to capture tail risk” (p. 3). For this reason, the Basel Committee is considering the use of ES, which is a coherent risk measure and has already become common in the insurance industry, though not yet in the banking industry. While ES is mathematically superior to VaR in that it does not show “tail risk” and is a coherent risk measure in being subadditive, its practical implementation and large calculation requirements may pose operational challenges to financial firms. Moreover, previous empirical findings based only on means and standard deviations suggested that VaR and ES were very similar in most practical cases, while ES could be less precise because of its larger variance. In this paper we find that ES is computationally feasible using personal computers and, contrary to previous research, it is shown that there is a stochastic difference between the 97.5% ES and 99% VaR. In the Gaussian case, they are similar but not equal, while in other cases they can differ substantially: in fat-tailed conditional distributions, on the one hand, 97.5%-ES would imply higher risk forecasts, while on the other, it provides a smaller down-side risk than using the 99%-VaR. It is found that the empirical results in the paper generally support the proposals of the Basel Committee. |
| Keywords: | Stochastic dominance, Value-at-Risk, Expected Shortfall, Optimizing strategy, Basel III Accord. |
| JEL: | G32 G11 G17 C53 C22 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doicae:1516&r=cfn |
| By: | Filippo Ippolito; José-Luis Peydró; Andrea Polo; Enrico Sette |
| Abstract: | By providing liquidity to depositors and credit line borrowers, banks are exposed to double-runs on assets and liabilities. For identification, we exploit the 2007 freeze of the European interbank market and the Italian Credit Register. After the shock, there are sizeable, aggregate double-runs. In the cross-section, pre-shock interbank exposure is (unconditionally) unrelated to post-shock credit line drawdowns. However, conditioning on firm observable and unobservable characteristics, higher pre-shock interbank exposure implies more post-shock drawdowns. We show that is the result of active pre-shock liquidity risk management by more exposed banks granting credit lines to firms that run less in a crisis. |
| Keywords: | credit lines, liquidity risk, financial crisis, runs, risk management |
| JEL: | G01 G21 G28 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:855&r=cfn |
| By: | Filippo Ippolito; José-Luis Peydró; Andrea Polo; Enrico Sette |
| Abstract: | By providing liquidity to depositors and credit line borrowers, banks are exposed to double-runs on assets and liabilities. For identification, we exploit the 2007 freeze of the European interbank market and the Italian Credit Register. After the shock, there are sizeable, aggregate double-runs. In the cross-section, pre-shock interbank exposure is (unconditionally) unrelated to post-shock credit line drawdowns. However, conditioning on firm observable and unobservable characteristics, higher pre-shock interbank exposure implies more post-shock drawdowns. We show that is the result of active pre-shock liquidity risk management by more exposed banks granting credit lines to firms that run less in a crisis. |
| Keywords: | Credit lines; Liquidity risk; Financial crisis; Runs; Risk management. |
| JEL: | G01 G21 G28 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1497&r=cfn |
| By: | Ippolito, Filippo; Peydró, José Luis; Polo, Andrea; Sette, Enrico |
| Abstract: | By providing liquidity to depositors and credit line borrowers, banks are exposed to double-runs on assets and liabilities. For identification, we exploit the 2007 freeze of the European interbank market and the Italian Credit Register. After the shock, there are sizeable, aggregate double-runs. In the cross-section, pre-shock interbank exposure is (unconditionally) unrelated to post-shock credit line drawdowns. However, conditioning on firm observable and unobservable characteristics, higher pre-shock interbank exposure implies more post-shock drawdowns. We show that is the result of active pre-shock liquidity risk management by more exposed banks granting credit lines to firms that run less in a crisis. |
| Keywords: | credit lines; financial crisis; liquidity risk; risk management; runs |
| JEL: | G01 G21 G28 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10948&r=cfn |
| By: | Nadja Dwenger (Universitat Hohenheim, CESifo); Frank M Fossen (Freie Universitat Berlin, DIW and IZA); Martin Simmler (Oxford University Centre for Business Taxation and DIW Berlin) |
| Abstract: | What began as a financial crisis in the United States in 2007¨C2008 quickly evolved into a massive crisis of the global real economy. We investigate the importance of the bank lending and firm borrowing channel in the international transmission of bank distress to the real economy ¡ªin particular, to real investment and labour employment by nonfinancial firms. We analyse whether and to what extent firms are able to compensate for the shortage in loan supply by switching banks and by using other types of financing. The analysis is based on a unique matched data set for Germany that contains firm-level financial statements for the 2004¨C2010 period together with the financial statements of each firm¡¯s relationship bank(s). We use instrumental variable estimations in first differences to eliminate firm and bank-specific effects. The first stage results show that banks that suffered losses due to proprietary trading activities at the onset of the financial crisis reduced their lending more strongly than non-affected banks. In the second stage, we find that firms whose relationship banks reduce credit supply downsize their real investment and labour employment significantly. This effect is larger for firms that are unable to provide much collateral. We document that firms partially offset reduced credit supply by establishing new bank relationships, using internal funds, and issuing new equity. |
| Keywords: | financial crisis; contagion; credit rationing; relationship lending; investment |
| JEL: | D22 D92 E44 G01 G20 G31 H25 H32 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:btx:wpaper:1516&r=cfn |
| By: | Schmal, Tom |
| Abstract: | Evaluating the risk behind capital projects can be one of management’s toughest calls. One reason is project risks are presented subjectively or as a metric without a practical relationship to return. The author addresses the problem by using a Monte Carlo simulation to find a project’s risk and uses that metric to find the project’s cost of capital. In this system, risk is determined by variation in free cash flow. Since every project in your company’s pipeline will have a free cash flow, every project, including those with financial leverage, can be evaluated using the same economic yardstick. Other benefits include better value projects, better presentation and accurate discount rates for NPV. |
| Keywords: | cost of capital, IRR, NPV, cash flow, Monte Carlo, capital project economics, risk-adjusted return, M-P5, variability, pure play, leverage, hurdle rate. |
| JEL: | D81 G32 |
| Date: | 2015–11–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:68092&r=cfn |
| By: | Simon Cornée |
| Abstract: | Using a unique, hand-collected database of 389 small loans granted by a French social bank dealing with genuinely small, informationally opaque businesses (mainly social enterprises), our study highlights the relevance of including soft information (especially on management quality) to improve credit default prediction. Comparing our findings with those of previous studies also reveals that the more opaque the borrower, the higher the predictive value of soft information in comparison with hard. Finally, a cost-benefit analysis shows that including soft information is economically valuable once collection costs have been accounted for, albeit to a moderate extent. |
| Keywords: | Credit Default Prediction; Credit Rating; Relationship Lending; Social Banking |
| JEL: | G21 M21 |
| Date: | 2015–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:2013/219172&r=cfn |
| By: | Ariane Szafarz |
| Abstract: | The essence of market efficiency is fair asset pricing, which is compatible with multiple price dynamics and speculative bubbles. However, many practitioners and financial academics criticize the efficient market hypothesis on the basis of highly volatile asset prices. I argue that the persisting confusion as to the nature of market efficiency is driven by the difficulty to grasp the financial interpretation of multiple solutions. Importantly, the confusion can mislead regulators when addressing volatility containment. Acknowledging the multiplicity of efficient price dynamics not only enriches the understanding of financial crises, but also helps designing appropriate regulations. |
| Keywords: | efficient markets; multiple solutions; rational expectations; speculative bubbles; volatility |
| JEL: | G14 G12 G10 B41 |
| Date: | 2015–09–28 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:2013/217756&r=cfn |
| By: | Philippe Bacchetta; Ouarda Merrouche |
| Abstract: | Despite international financial disintegration, we document a dramatic increase in dollar borrowing among leveraged Eurozone corporates during the Great Financial Crisis. Using loan-level data, we trace this increase to the twin crisis in the credit market and in funding markets. The reduction in the supply of credit by Eurozone banks caused riskier borrowers to shift to foreign banks, in particular US banks. The coincident rise in the relative cost of euro wholesale funding and the disruptions in the FX swap market caused a rise in dollar borrowing from US banks, especi ally for firms in export-oriented sectors. Although global bank lending is often reported to amplify the international credit cycle, we show that foreign banking acted as a shock absorber that weathered the real consequences of the credit crunch in Europe. |
| Keywords: | Money market, swaps, credit crunch, corporate debt, foreign banks |
| JEL: | G21 G30 E44 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:15.08&r=cfn |
| By: | Kilian Huber |
| Abstract: | This paper analyses the effects of bank lending on GDP and employment. Following losses on international financial markets in 2008/09, a large German bank cut its lending to the German economy. I exploit variation in dependence on this bank across counties. To address the correlation between county GDP growth and dependence on this bank, I use the distance to the closest of three temporary, historic bank head offices as instrumental variable. The results show that the effects of the lending cut were persistent, and resembled the growth patterns of developed economies during and after the Great Recession. For two years, the lending cut reduced GDP growth. Thereafter, affected counties remained on a lower, parallel trend. The firm results exhibit similar dynamics, and show that the lending cut primarily affected capital expenditures. Overall, the lending cut reduced aggregate German GDP in 2012 by 3.9 percent, and employment by 2.3 percent. This shows that a single bank can persistently shape macroeconomic growth. |
| Keywords: | Banking crisis, financial frictions, lending, GDP, growth, employment |
| JEL: | D22 D53 E24 E44 G01 G21 J01 J23 J30 O16 O40 O47 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1389&r=cfn |
| By: | Michael McAleer (National Tsing Hua University, Taiwan; Erasmus University Rotterdam, the Netherlands; Complutense University of Madrid, Spain) |
| Abstract: | The purpose of the paper is to present the fundamental equation in tourism finance that connects tourism research to empirical finance and financial econometrics. The energy industry, which includes, oil, gas and bio-energy fuels, together with the tourism industry, are two of the most important industries in the world today in terms of employment and generating income. The primary purpose in attracting domestic and international tourists to a country, region or city is to maximize tourism expenditure. The paper will concentrate on daily tourism expenditure, regardless of whether such data might be readily available. If such data are not available, a practical method is presented to calculate the appropriate data. |
| Keywords: | Tourism research; tourism finance; growth in tourism; returns on tourism; volatility; fundamental equation; empirical finance; financial econometrics. |
| JEL: | C22 C32 C58 G32 |
| Date: | 2015–11–23 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20150129&r=cfn |
| By: | Valentin SCARLAT (Faculty of Economics, Ecological University of Bucharest); Dana Gabriela SISEA (Faculty of Economics, Ecological University of Bucharest) |
| Abstract: | In Romania the main bank’s activity is lending operation. Indeed, between banks' placements in first place stand the credits. The way in which banks allot the funds they manage can influence a decisive economic development locally or nationwide. On the other hand, any bank will assume, to some extent, risks when granting credits and, certainly, all banks currently register losses in the credit portfolio, when some borrowers does not honour their obligations. But whatever the risks, the credit portfolio losses can be minimized if credit operations are organized and managed professionally. From this point of view, the most important feature of the bank's management is to control the quality of the credit portfolio. This is because the poor quality of loans is the main cause of the banking failure. As you look into a report of a central bank report, the main causes of banks’ bankruptcies are: negligence in the lending rules’ elaboration; presence of too generous lending conditions, coupled with the absence of some clear normative; non-compliance with the internal rules of lending by the bank's staff; concentration of risky loans on certain market segments; weak control over the staff (credit officers); excessive growth of credit portfolio value, over reasonable possibilities to cover bank’s risks; faulty or non-existent systems for detecting problem loans; ignoration of the customers’ cash flow; preferential crediting (under market conditions). |
| Keywords: | lending, credit policy, individual credit risk, global credit risk management |
| JEL: | G21 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:eub:wp2014:2014-04&r=cfn |
| By: | Papafilis, Michalis-Panayiotis; Psillaki, Maria; Margaritis, Dimitris |
| Abstract: | This paper examines the changes in the interdependence between sovereign and bank credit risk, that were noticed, after the announcement of the voluntary exchange program of Greek bonds, with the participation of the private sector (Private Sector Involvement - PSI). More precisely, we investigate the progress of the credit default swaps (CDS) of eight eurozone countries and of twenty-one banking institutions, for the period of January 2009 to May 2014. We divide the sample into two sub-periods, based on the announcement of the program. We apply Hsiao's methodology (1981), in order to ascertain the causality which is observed between the CDS series and potential changes in their relationship, due to the implementation of the PSI. We identify limited causality relations between countries and banks of the sample examined, in the second sub-period, while the size of the interaction is reduced in the same period. After developing a Difference-in-Difference model, we confirm the weakening of causal relationships between the CDS series studied, for the period, after the announcement of the PSI. Our results suggest that the implementation of the PSI has contributed to the limitation of the interdependence between the CDS spreads of the sovereigns and banks in the period that follows. |
| Keywords: | CDS spreads, PSI, sovereign credit risk, bank credit risk, debt crisis, contagion, eurozone |
| JEL: | F34 F42 G28 H12 H63 |
| Date: | 2015–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:68037&r=cfn |
| By: | Nicoleta CARAGEA (Faculty of Economics, Ecological University of Bucharest); Antoniade Ciprian ALEXANDRU (Faculty of Economics, Ecological University of Bucharest); Ana Maria DOBRE (National Institute of Statistics, Bucharest, Romania) |
| Abstract: | This study aims to expose the profile of the pattern of saving for the financial consumers of a Romanian bank. The methodology of analysis is based on a logistic regression, using the relationship between variables which expose relevant characteristics of persons who save money. The analysis was conducted in R software, which represents a powerful tool for statistical modelling. |
| Keywords: | R statistical software, pattern of saving, bank, logistic regression, statistical analysis |
| JEL: | G21 C34 C87 O16 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:eub:wp2014:2014-02&r=cfn |