Research articles for the 2019-10-12
A Structural Model of Interbank Network Formation and Contagion
SSRN
The interbank network, in which banks compete with each other to supply and demand differentiated financial products, fulfils an important function but may also result in risk propagation. We examine this trade-off by setting out a model in which banks form interbank network links endogenously, taking into account the effect of links on default risk. We estimate this model based on novel, granular data on aggregate exposures between banks. We find that the decentralised interbank market is not efficient: a social planner would be able to increase surplus on the interbank market by 13% without increasing mean bank default risk or decrease mean bank default risk by 4% without decreasing interbank surplus. We then propose two novel regulatory interventions (caps on aggregate exposures and pairwise capital requirements) that result in efficiency gains.
SSRN
The interbank network, in which banks compete with each other to supply and demand differentiated financial products, fulfils an important function but may also result in risk propagation. We examine this trade-off by setting out a model in which banks form interbank network links endogenously, taking into account the effect of links on default risk. We estimate this model based on novel, granular data on aggregate exposures between banks. We find that the decentralised interbank market is not efficient: a social planner would be able to increase surplus on the interbank market by 13% without increasing mean bank default risk or decrease mean bank default risk by 4% without decreasing interbank surplus. We then propose two novel regulatory interventions (caps on aggregate exposures and pairwise capital requirements) that result in efficiency gains.
Credit Fluctuations and 'Neglected Crash Risk' in U.S. Bank Returns
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Using U.S. quarterly data from 1960, the paper studies the interaction between bank stock returns and aggregate credit fluctuations on a set of economic dimensions. First, I investigate the source of "Neglected Crash Risk" in U.S. bank returns using a new deviation measure of aggregate loans per capita called ltd. A one standard deviation increase in ltd decreases bank stock returns by 5%, and their dividend growth by almost 6% over the following year. This variable embeds important information about both future returns (discount rate news) and cash flow growth (dividend news); yet a decomposition of future unexpected bank returns shows a higher incremental effect associated with the variance of news about the discount rate. Second, I quantify the size of "Neglected Crash Risk" and find it is economically and statistically significant at different forecast horizons and for different degrees of credit boom intensity. I interpret its size as the outcome of differences in perceived disaster probabilities by investors across credit regimes. Lastly, changes in monetary policy activate crash risk in the perception of commercial bank investors. A straightforward application of the local-projection methods of Jorda (2005) illustrates that a contractionary-type monetary policy action decreases bank returns more when the economy had experienced credit booms in the past.
SSRN
Using U.S. quarterly data from 1960, the paper studies the interaction between bank stock returns and aggregate credit fluctuations on a set of economic dimensions. First, I investigate the source of "Neglected Crash Risk" in U.S. bank returns using a new deviation measure of aggregate loans per capita called ltd. A one standard deviation increase in ltd decreases bank stock returns by 5%, and their dividend growth by almost 6% over the following year. This variable embeds important information about both future returns (discount rate news) and cash flow growth (dividend news); yet a decomposition of future unexpected bank returns shows a higher incremental effect associated with the variance of news about the discount rate. Second, I quantify the size of "Neglected Crash Risk" and find it is economically and statistically significant at different forecast horizons and for different degrees of credit boom intensity. I interpret its size as the outcome of differences in perceived disaster probabilities by investors across credit regimes. Lastly, changes in monetary policy activate crash risk in the perception of commercial bank investors. A straightforward application of the local-projection methods of Jorda (2005) illustrates that a contractionary-type monetary policy action decreases bank returns more when the economy had experienced credit booms in the past.
Customer Satisfaction Comparison between Islamic and Conventional Banks: Case Study of Qatari Banks
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This paper examines customer satisfaction in Islamic banks in Qatar in comparison with their conventional counterpart. It is an attempt to investigate whether Islamic banks have overcome the obstacle of being relatively new; whether they have started providing satisfying services to their customers or whether they act as taking advantage of their customers’ needs for Islamic finance products and treat them as captive clients who resort to Islamic banks for religious reasons. The research queries needed to be answered by the bank’s customers themselves to test their view of the services they get. A comprehensive comparative questionnaire was formulated. Responses from the questionnaire and other data collected from banks’ websites, personal interviews, etc., were analyzed. The paper conducted cross-sector comparisons of Islamic and conventional banking as well as individual comparisons between banks. Analysis of these results, computing averages and comparing them at the level of each bank as well as at the sectoral level between Islamic banks and conventional banks, was conducted. Through this, the paper attempts to uncover banks’ performance and find out all areas of improvements that the Islamic and conventional banks need to work on.
SSRN
This paper examines customer satisfaction in Islamic banks in Qatar in comparison with their conventional counterpart. It is an attempt to investigate whether Islamic banks have overcome the obstacle of being relatively new; whether they have started providing satisfying services to their customers or whether they act as taking advantage of their customers’ needs for Islamic finance products and treat them as captive clients who resort to Islamic banks for religious reasons. The research queries needed to be answered by the bank’s customers themselves to test their view of the services they get. A comprehensive comparative questionnaire was formulated. Responses from the questionnaire and other data collected from banks’ websites, personal interviews, etc., were analyzed. The paper conducted cross-sector comparisons of Islamic and conventional banking as well as individual comparisons between banks. Analysis of these results, computing averages and comparing them at the level of each bank as well as at the sectoral level between Islamic banks and conventional banks, was conducted. Through this, the paper attempts to uncover banks’ performance and find out all areas of improvements that the Islamic and conventional banks need to work on.
Emerging African Economies: Digital Structures, Disruptive Responses and Demographic Implications
SSRN
Indeed, the world economy is a complex system that has undergone many different phases in the past century. Particularly, the African economy is undergoing a series of transformations (transitions) that subject the future to considerable uncertainty, complexity and unpredictability. In fact, some transformations are cyclical while others are longer-term and more structural in nature. Yet, these transitions or emergence interact in shaping the future; making extrapolation from the past an increasingly unreliable source for future predictions. Thus unlike the previous revolutions, the fourth industrial revolution is characterized by the emergence of various technologies such as virtual (augmented) realities, nanotechnologies, 3D printing, machine learning, big data, cloud computing, drones, autonomous vehicles, robotics, artificial intelligence and blockchain technologies. Again, in this digitization era, work is constantly reshaped by technological progress, while firms adopt new ways of production and markets expand. In other worlds, digital technology brings opportunity, pave the way to create new jobs and increase productivity. Unfortunately, this paper argued that while the digital revolution has forged ahead, its analog complements (regulated entry and competition, new economy skills access and accountable institutions) have not kept pace in Africa. Consequently, African governments should formulate digital development strategies that are much broader than current ICTs strategies. That is, they should create a policy and institutional environment for technology that fosters the greatest benefits to African people of twenty-first century and beyond.
SSRN
Indeed, the world economy is a complex system that has undergone many different phases in the past century. Particularly, the African economy is undergoing a series of transformations (transitions) that subject the future to considerable uncertainty, complexity and unpredictability. In fact, some transformations are cyclical while others are longer-term and more structural in nature. Yet, these transitions or emergence interact in shaping the future; making extrapolation from the past an increasingly unreliable source for future predictions. Thus unlike the previous revolutions, the fourth industrial revolution is characterized by the emergence of various technologies such as virtual (augmented) realities, nanotechnologies, 3D printing, machine learning, big data, cloud computing, drones, autonomous vehicles, robotics, artificial intelligence and blockchain technologies. Again, in this digitization era, work is constantly reshaped by technological progress, while firms adopt new ways of production and markets expand. In other worlds, digital technology brings opportunity, pave the way to create new jobs and increase productivity. Unfortunately, this paper argued that while the digital revolution has forged ahead, its analog complements (regulated entry and competition, new economy skills access and accountable institutions) have not kept pace in Africa. Consequently, African governments should formulate digital development strategies that are much broader than current ICTs strategies. That is, they should create a policy and institutional environment for technology that fosters the greatest benefits to African people of twenty-first century and beyond.
Informed Trading, Order Flow Shocks and the Cross-section of Expected Returns in Borsa Ä°stanbul
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This paper examines the relationship between information asymmetry and stock returns in Borsa Ä°stanbul. For all stocks that are traded in Borsa Ä°stanbul between March 2005 and April 2017, we estimate the probability of informed trading (PIN) by Duarte and Young (2009) factorization and a grid-search algorithm similar to Yan and Zhang (2012). Firm level cross-sectional regressions indicate a statistically insignificant relationship between PIN estimates and future returns. Moreover, univariate and multivariate portfolio analyses assert that investors that hold stocks that have high information asymmetry do not obtain significant future returns. Consequently, our results suggest that information asymmetry proxied by PIN is a firm-specific risk and can be eliminated with portfolio diversification. Findings are robust to different factorization in estimating PIN and free of any bias due to trade classification algorithms, boundary solutions, floating point exceptions and systematic order flow shocks.
SSRN
This paper examines the relationship between information asymmetry and stock returns in Borsa Ä°stanbul. For all stocks that are traded in Borsa Ä°stanbul between March 2005 and April 2017, we estimate the probability of informed trading (PIN) by Duarte and Young (2009) factorization and a grid-search algorithm similar to Yan and Zhang (2012). Firm level cross-sectional regressions indicate a statistically insignificant relationship between PIN estimates and future returns. Moreover, univariate and multivariate portfolio analyses assert that investors that hold stocks that have high information asymmetry do not obtain significant future returns. Consequently, our results suggest that information asymmetry proxied by PIN is a firm-specific risk and can be eliminated with portfolio diversification. Findings are robust to different factorization in estimating PIN and free of any bias due to trade classification algorithms, boundary solutions, floating point exceptions and systematic order flow shocks.
OTC Microstructure in a Period of Stress: A Multiâ€'Layered Network Approach
SSRN
Using unique data at transaction and counterparty identity level, we study the microstructure of the Swiss franc FX overâ€'theâ€'counter (OTC) derivatives market during a time of stress that was triggered by the decision of the Swiss National Bank (SNB) to remove the Swiss francâ€'euro exchange rate floor on 15 January 2015. Building on new methodology based on the topology of the trading network we segment the market into a multiâ€'layered structure. We observe that the SNB announcement had a clear and differentiate impact on the market from this perspective. Clients in a more central position in the network topology were able to enter the market sooner than peripheral counterparties, while the interâ€'dealer core of the market was largely inactive. Using outstanding positions to proxy demand we observe that clients in greater need of trading were offered unfavourable prices if they found liquidity. Overall, our results point to a shortage of liquidity in the phase of market adjustment and highlight the heterogeneous reactions of different market segments during that time.
SSRN
Using unique data at transaction and counterparty identity level, we study the microstructure of the Swiss franc FX overâ€'theâ€'counter (OTC) derivatives market during a time of stress that was triggered by the decision of the Swiss National Bank (SNB) to remove the Swiss francâ€'euro exchange rate floor on 15 January 2015. Building on new methodology based on the topology of the trading network we segment the market into a multiâ€'layered structure. We observe that the SNB announcement had a clear and differentiate impact on the market from this perspective. Clients in a more central position in the network topology were able to enter the market sooner than peripheral counterparties, while the interâ€'dealer core of the market was largely inactive. Using outstanding positions to proxy demand we observe that clients in greater need of trading were offered unfavourable prices if they found liquidity. Overall, our results point to a shortage of liquidity in the phase of market adjustment and highlight the heterogeneous reactions of different market segments during that time.
