nep-fmk New Economics Papers
on Financial Markets
Issue of 2010‒05‒02
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Credit Conditions and Recoveries from Recessions Associated with Financial Crises By Prakash Kannan
  2. Changing Perceptions of Maturity Mismatch in the US Banking System: Evidence from Equity Markets By Andrew T. Young; Travis Wiseman; Thomas L. Hogan
  3. Smooth Transition Patterns in the Realized Stock Bond Correlation By Nektarios Aslanidis; Charlotte Christiansen
  4. Hedging Errors Induced by Discrete Trading Under an Adaptive Trading Strategy By Mats Brod\'en; Magnus Wiktorsson
  5. InsiderTrading, Option Exercises and Private Benefits of Control By Cziraki, P.; Goeij, P. C. de; Renneboog, L.D.R.
  6. Volatility Co-movement of ASEAN-5 Equity Markets By Oh, Swee-Ling; Lau, Evan; Puah, Chin-Hong; Abu Mansor, Shazali
  7. The Role of Bond Finance in Firms' Survival During the Asian Crisis By Marina-Eliza Spaliara; Serafeim Tsoukas
  8. Crisis Management and Resolution for a European Banking System By Alessandro Giustiniani; Wim Fonteyne; Wouter Bossu; Alessandro Gullo; Sean Kerr; Daniel C. L. Hardy; Luis Cortavarria
  9. What do premiums paid for bank M&As reflect? The case of the European Union By Jens Hagendorff; Ignacio Hernando; María J. Nieto; Larry D. Wall

  1. By: Prakash Kannan
    Abstract: Recoveries from recessions associated with a financial crisis tend to be sluggish. In this paper, we present evidence that stressed credit conditions are an important factor constraining the pace of recovery. In particular, using industry-level data, we find that industries relying more on external finance grow more slowly than other industries during recoveries from recessions associated with financial crises. Additional tests, based on establishment size, on alternative definitions of financial crises, and on corporate-government interest rate spreads, support the findings. Moreover, for subsets of industries where financial frictions are more severe, we find much stronger differential growth effects.
    Keywords: Bank credit , Banking crisis , Business cycles , Credit , Developed countries , Economic models , Economic recession , Economic recovery , External financing , Financial crisis , Industrial sector , Production growth ,
    Date: 2010–03–31
  2. By: Andrew T. Young (Department of Economics, West Virginia University); Travis Wiseman (Department of Economics, West Virginia University); Thomas L. Hogan (Department of Economics, George Mason University)
    Abstract: US banks are thought to have become increasingly fragile and exposed during the lead-up to the recent financial crisis. However, commercial bank leverage actually decreased during this period. To resolve this discrepancy, we explore another dimension of bank balance sheets: the effective maturity mismatch between assets and liabilities. Although banks assets are generally longer in term than their liabilities, we find evidence of a structural break in the mid-1990s when equity markets begin pricing banks as relatively longer-funded. Categories of bank assets such as real estate loans (i.e., mortgages and MBSs) and consumer loans were perceived as having become effectively shorter-term.
    Keywords: maturity mismatch, effective maturity, commercial banks, GSEs, Fannie and Freddie
    JEL: G21 E44
    Date: 2010
  3. By: Nektarios Aslanidis (Department of Economics, FCEE, University Rovira Virgili); Charlotte Christiansen (School of Economics and Management, Aarhus University and CREATES)
    Abstract: This paper re-examines the joint distribution of equity and bond returns using high frequency data. In particular, we analyze the weekly realized stock bond correlation calculated from 5-minute returns of the futures prices of the S&P 500 and the 10-year Treasury Note. A potentially gradual transition in the realized correlation is accommodated by regime switching smooth transition regressions. The regimes are defined by the VIX/VXO volatility index and the model includes additional economic and financial explanatory variables. The empirical results show that the smooth transition model has a better fit than a linear model at forecasting in sample, whereas the linear model is more accurate for out-of-sample forecasting. It is also shown that it is important to account for differences between positive and negative realized stock bond correlations.
    Keywords: realized correlation, smooth transition regressions, stock bond correlation, VIX index
    JEL: C22 G11
    Date: 2010–04–26
  4. By: Mats Brod\'en; Magnus Wiktorsson
    Abstract: Discrete time hedging in a complete diffusion market is considered. The hedge portfolio is rebalanced when the absolute difference between delta of the hedge portfolio and the derivative contract reaches a threshold level. The rate of convergence of the expected squared hedging error as the threshold level approaches zero is analyzed. The results hinge to a great extent on a theorem stating that the difference between the hedge ratios normalized by the threshold level tends to a triangular distribution as the threshold level tends to zero.
    Date: 2010–04
  5. By: Cziraki, P.; Goeij, P. C. de; Renneboog, L.D.R. (Tilburg University, Center for Economic Research)
    Abstract: We investigate patterns of abnormal stock performance around insider trades and option exercises on the Dutch market. Listed firms in the Netherlands have a long tradition of employing many anti-shareholder mechanisms limiting shareholders rights. Our results imply that insider transactions are more profitable at firms where shareholder rights are not restricted by antishareholder mechanisms. This finding goes against the monitoring hypothesis which states that more shareholder orientation and stronger blockholders would reduce the gains from insider trading. We show robust support for the substitution hypothesis as insiders of firms which effectively curtail shareholder rights enjoy valuable private benefits of control in lieu of engaging in insider trading to exploit their position.
    Keywords: insider trading;management stock options;timing by insiders;corporate governance;antishareholder mechanisms;anti-takeover mechanisms.
    JEL: G14 G34 M52
    Date: 2010
  6. By: Oh, Swee-Ling; Lau, Evan; Puah, Chin-Hong; Abu Mansor, Shazali
    Abstract: Purpose – Economic cross-linkages and the increased co-movement of asset prices across international markets are important outcomes as the result of globalization. Hereby, the nature of international stock markets and the extent to which the 1997-1998 East Asian turmoil had affected the market relationship of five countries of Association of Southeast Asian Nations (ASEAN-5) remain as probing questions. Design/methodology/approach – We resort to the standard time series econometrics analysis. These include the unit root, cointegration and the Granger causality tests. Hereby, further empirical analyzes is conducted upon two sub-periods of interest: (1) pre-crisis period from 1987:1 to 1997:7 and (2) post-crisis period from 1997:8 to 2007:12. This is to allow for possible transitional motion leading to and departing from the crisis. Findings – Using an array of econometrics analysis upon the stock price volatility series, we found partial market integration for the pre-crisis; whereas in the post-crisis, complete integration prevails. Hence, the financial meltdown in 1997 is said to be a contagion led crisis as markets integrate well off after the crisis than prior to it. Nonetheless, long run portfolio asset diversification benefits across the ASEAN-5 basin are reduced as markets are integrated in both the pre- and post-crisis. Originality/value – The paper is of value by showing to uncover the issue of interdependence of stock market integration focusing on the ASEAN-5 economies. The formation of the ASEAN Investment Area (AIA- 1998) parallel with the establishment of a developed ASEAN Index-Financial Times Stock Exchange (FTSE) regional index is viable to foster deeper regional market convergence.
    Keywords: ASEAN-5; Portfolio Diversification; Volatility co-movement
    JEL: C32 G15 C22
    Date: 2010–04–03
  7. By: Marina-Eliza Spaliara (Loughborough University); Serafeim Tsoukas (University of Nottingham, Hong Kong Institute for Monetary Research)
    Abstract: In this paper we assess the effects of bond financing on firms' survival during the 1997-98 Asian crisis. Using a novel database covering the period 1995 to 2007 for five Asian economies most affected by the crisis - Indonesia, Korea, Malaysia, Singapore and Thailand - we find strong evidence that the Asian crisis affected both directly and indirectly (through interactions with financial indicators) the probability of survival. More importantly, we show that bond issuers, irrespective of the currency denomination, are more likely to survive compared to non-issuers. Nevertheless, only firms issuing bonds in local currency are shielded from the adverse effects of the crisis.
    Keywords: Bond Financing, Financial Crisis, Firm Survival, East Asia
    JEL: F32 F34 G15 L20
    Date: 2010–02
  8. By: Alessandro Giustiniani; Wim Fonteyne; Wouter Bossu; Alessandro Gullo; Sean Kerr; Daniel C. L. Hardy; Luis Cortavarria
    Abstract: This paper proposes an integrated crisis management and resolution framework for the EU's single banking market. It comprises a European Resolution Authority (ERA), armed with the mandate and the tools to deal cost-effectively with failing systemic cross-border banks, and is designed to address many fundamental operational and incentive problems. It also seeks to reduce moral hazard and better protect countries against the risk of twin fiscal-financial crises by detaching banks from government budgets. The ERA would be most effective if it were twinned or combined with a European Deposit Insurance and Resolution Fund.
    Keywords: Bank reforms , Bank resolution , Bank supervision , Banking crisis , Banking systems , Economic integration , European Monetary System , Financial crisis , Financial stability , Global Financial Crisis 2008-2009 , Risk management ,
    Date: 2010–03–19
  9. By: Jens Hagendorff (University of Leeds); Ignacio Hernando (Banco de España); María J. Nieto (Banco de España); Larry D. Wall (Federal Reserve Bank of Atlanta)
    Abstract: We analyze the takeover premiums paid for a sample of European bank mergers between 1997 and 2007. We find that acquiring banks value profitable, high-growth and low risk targets. We also find that the strength of bank regulation and supervision as well as deposit insurance regimes in Europe have measurable effects on takeover pricing. Stricter bank regulatory regimes and stronger deposit insurance schemes lower the takeover premiums paid by acquiring banks. This result, presumably in anticipation of higher compliance costs, is mainly driven by domestic deals. Also, we find no conclusive evidence that bidders seek to extract benefits from regulators either by paying a premium for deals in less regulated regimes or by becoming "too big to fail".
    Keywords: banks, mergers, premiums, European Union
    JEL: G21 G34 G28
    Date: 2010–04

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