nep-fmk New Economics Papers
on Financial Markets
Issue of 2006‒12‒22
two papers chosen by

  1. Stress Testing the Corporate Loans Portfolio of the Canadian Banking Sector By Miroslav Misina; David Tessier; Shubhasis Dey
  2. Capital Markets, Ownership and Distance By Wendy Carlin; Andrew Charlton; Colin Mayer

  1. By: Miroslav Misina; David Tessier; Shubhasis Dey
    Abstract: Stress testing, at its most general level, is an investigation of the performance of an entity under abnormal operating conditions. The authors focus on one set of entities--the Canadian banking sector--and investigate losses in the loans portfolio of this sector as a function of changing circumstances in the different industries in which these loans reside. These circumstances are characterized by means of one summary measure--sectoral probabilities of default--and this measure is modelled as a function of macroeconomic variables. Using this model, the authors assess the interrelationship between the macroeconomic environment and sectoral defaults, and perform a series of stress tests under different scenarios that are thought to be most pertinent to Canada. The tools underlying the authors' analysis are general and can be applied to other countries, as well as to other macroeconomic scenarios.
    Keywords: Financial stability, Financial institutions
    JEL: C15 G21 G33
    Date: 2006
  2. By: Wendy Carlin; Andrew Charlton; Colin Mayer
    Abstract: This paper uses a new data-set to examine how internal capital markets and foreignownership affect investment. Our data allow us to compare investment behaviour of listedsubsidiaries with stand-alone firms while controlling for investment opportunities of parentand subsidiary firms. We evaluate how the size of ownership and the geographical proximityof majority owners to their subsidiaries affect firm investment efficiency. We find that theinvestment of subsidiaries is more sensitive to investment opportunities than that of standalonefirms and falls when investment opportunities of parent firms improve. This suggeststhat there are internal capital markets that reallocate funds towards units with betterinvestment opportunities. We find that investment allocation is most efficient where parentshave modest ownership stakes and are distant from their subsidiaries and when subsidiariesoperate in well developed financial markets. These results indicate that influence costsimposed by dominant parents may outweigh their potential informational benefits, especiallywhen subsidiaries are located in countries with weaker financial development.
    Keywords: Investment, Internal Capital Markets, Foreign Ownership
    JEL: F21 G31
    Date: 2006–08

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