Research articles for the 2019-03-02

Income Diversification and Bank Stability: Evidence from India
kaur, Navneet,Srivatsav, Santosh,Jadiyappa, Nemiraja,Kaur, Parneet
Modern portfolio theory claims that diversification into non-correlated or negatively correlated activities reduces the overall risk of a portfolio. Considering the total income of a bank as a portfolio of interest income and non-interest income, this paper investigates how the variability of interest income and non- interest income, and covariance between interest income and non-interest income influence the various risk factors of banks. We set out a study in the Indian context. We have extracted data for the period 2005-2017 and employed an extended version of Ridge, Lasso and Elastics Net regression to take care of multi-collinearly in our data. We have considered 10-fold cross-validation techniques to get optimal values of tuning parameters for Ridge, Lasso, and Elastics Net regression (which is a convex combination of ridge and the LASSO). We have compared different regression techniques by comparing RMSE and R2. We observe that non-interest income is positively correlated with interest income in the Indian context, but it does stabilize variance, idiosyncratic risk & market risk (Beta) of Indian Banks.

Labor Restructuring and Acquisitions: Evidence From State Adoption of the Worker Adjustment and Retraining Notification Act
Chunyu, Liangrong,Tran, Anh L.
We examine whether labor restructuring is an important consideration in making acquisition decisions using U.S. interstate variations in the Worker Adjustment and Retraining Notification Act. We show that the introduction of this labor layoff law has a negative impact both on the aggregated number and value of acquisition activities and on the acquirer’s announcement returns. The decrease in acquirer returns is only due to lower combined synergies, rather than wealth transferred to the target’s shareholders from the acquirer’s shareholders. Overall, our paper suggests that labor restructuring is an important source to generate acquisition operating synergies.

Open FX Forwards: Introducing a Standard Mark-to-Model Approach
Hölbl, Martin,Lovric, Goran
This paper focuses on the mark-to-model valuation of open foreign exchange (FX) forwards, a popular instrument for hedging FX exposures with higher degree of flexibility with respect to settlement date and settlement amount compared to (standard) closed forwards. While there is sufficient coverage of valuation models and risks of closed FX forwards in literature (see e.g.Hull 2012), we observe limited or no coverage on open forwards in spite of the increasing utilization of those hedging instruments globally. The paper introduces a standard mark-to-model approach for open FX forwards in dependence of the window period of the open FX forward, with the model being tested using swing-option pricing methods based on the Longstaff -Schwartz algorithm (Longstaff and Schwartz, 2001) as well as forward-based pricing approaches (Hull(2012), Jorion(2010)).To our knowledge, this is the first paper focusing on mark-to-model valuations of open FX forwards within the framework of a stochastic model.