nep-rmg 2010-08-28 papers

on Risk Management

Issue of 2010‒08‒28
two papers chosen by
Stan Miles
Thompson Rivers University

Does diversification increase or decrease bank risk and performance? Evidence on diversification and the risk-return tradeoff in banking By Berger, Allen N.; Hasan, Iftekhar; Korhonen, Iikka; Zhou, Mingming
Conditional Correlations and Volatility Spillovers Between Crude Oil and Stock Index Returns By Chia-Lin Chang; Michael McAleer; Roengchai Tansuchat

Does diversification increase or decrease bank risk and performance? Evidence on diversification and the risk-return tradeoff in banking

By:	Berger, Allen N. (BOFIT); Hasan, Iftekhar (BOFIT); Korhonen, Iikka (BOFIT); Zhou, Mingming (BOFIT)
Abstract:	Conventional wisdom in banking argues that diversification tends to reduce bank risk and improve performance, but the recent financial crisis suggests that aggressive diversification strategies may have resulted in increased risk taking and poor performance. This paper addresses this important question by evaluating the empirical relationship between diversification strategies and the risk-return tradeoff in banking. Our data set covers Russian banks during the 1999-2006 period and finds somewhat mixed results. Specifically, we find that banks’ performance tends to be non-monotonically related to their diversification strategy. The marginal effects of focus indices (inverse measures of diversification) on performance are nonlinearly associated with the level of risk and foreign ownership. A focused strategy is found to be associated with increased profit and decreased risk only up to a certain threshold. Additionally, when foreign ownership is either very high or very low, banks tend to benefit more from being diversified. This analysis provides important strategic and policy implications for bank managers and regulators in Russia as well as in other emerging economies.
Keywords:	banks; diversification; focus; Russia; foreign ownership; scope economies
JEL:	G21 G28 G34
Date:	2010–06–21
URL:	http://d.repec.org/n?u=RePEc:hhs:bofitp:2010_009&r=rmg

Conditional Correlations and Volatility Spillovers Between Crude Oil and Stock Index Returns

By:	Chia-Lin Chang (Department of Applied Economics, National Chung Hsing University); Michael McAleer (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, and Institute of Economic Research, Kyoto University); Roengchai Tansuchat (Faculty of Economics, Maejo University)
Abstract:	This paper investigates the conditional correlations and volatility spillovers between the crude oil and financial markets, based on crude oil returns and stock index returns. Daily returns from 2 January 1998 to 4 November 2009 of the crude oil spot, forward and futures prices from the WTI and Brent markets, and the FTSE100, NYSE, Dow Jones and S&P500 stock index returns, are analysed using the CCC model of Bollerslev (1990), VARMA- GARCH model of Ling and McAleer (2003), VARMA-AGARCH model of McAleer, Hoti and Chan (2008), and DCC model of Engle (2002). Based on the CCC model, the estimates of conditional correlations for returns across markets are very low, and some are not statistically significant, which means the conditional shocks are correlated only in the same market and not across markets. However, the DCC estimates of the conditional correlations are always significant. This result makes it clear that the assumption of constant conditional correlations is not supported empirically. Surprisingly, the empirical results from the VARMA-GARCH and VARMA-AGARCH models provide little evidence of volatility spillovers between the crude oil and financial markets. The evidence of asymmetric effects of negative and positive shocks of equal magnitude on the conditional variances suggests that VARMA-AGARCH is superior to VARMA-GARCH and CCC.
Keywords:	Multivariate GARCH, volatility spillovers, conditional correlations, crude oil prices, spot, forward and futures prices, stock indices.
JEL:	C22 C32 G32
Date:	2010–08
URL:	http://d.repec.org/n?u=RePEc:kyo:wpaper:715&r=rmg

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