Research articles for the 2020-05-23
A Novel Mimic-Style Model of European Bank Technical Efficiency and Productivity Growth
SSRN
Using Bayesian Monte Carlo methods, we augment a stochastic distance function measure of bank efficiency and productivity growth with indicators of capitalization, return and risk. Our novel Multiple Indicator-Multiple Cause (MIMIC) style model generates more precise estimates of policy relevant parameters such as returns to scale, technical inefficiency and productivity growth. We find considerable variation in the performance of EU-15 banks over the period 2008 to 2015. For the vast majority of banks, productivity growth â€" the sum of efficiency and technical changes â€" is negative, implying that the industry would benefit from innovation. We show that greater technical efficiency is associated with higher profitability, higher capital, a lower probability of default and lower return volatility.
SSRN
Using Bayesian Monte Carlo methods, we augment a stochastic distance function measure of bank efficiency and productivity growth with indicators of capitalization, return and risk. Our novel Multiple Indicator-Multiple Cause (MIMIC) style model generates more precise estimates of policy relevant parameters such as returns to scale, technical inefficiency and productivity growth. We find considerable variation in the performance of EU-15 banks over the period 2008 to 2015. For the vast majority of banks, productivity growth â€" the sum of efficiency and technical changes â€" is negative, implying that the industry would benefit from innovation. We show that greater technical efficiency is associated with higher profitability, higher capital, a lower probability of default and lower return volatility.
Cyclical Lending Standards: A Structural Analysis
SSRN
Lending standards are a direct measure of credit conditions. We use the micro data merged from three separate sources to construct this measure and document that an uncertain macroeconomic outlook, rather than banks' balance sheet positions, was an important reason that a majority of banks tightened bank lending standards during the Great Recession. Our extensive data analysis disciplines how we introduce credit frictions in the banking sector into a macroeconomic model. The model estimation reveals that an exogenous shock to credit supply drives cyclical lending standards and accounts for a significant portion of fluctuations in bank loans and aggregate output.
SSRN
Lending standards are a direct measure of credit conditions. We use the micro data merged from three separate sources to construct this measure and document that an uncertain macroeconomic outlook, rather than banks' balance sheet positions, was an important reason that a majority of banks tightened bank lending standards during the Great Recession. Our extensive data analysis disciplines how we introduce credit frictions in the banking sector into a macroeconomic model. The model estimation reveals that an exogenous shock to credit supply drives cyclical lending standards and accounts for a significant portion of fluctuations in bank loans and aggregate output.
Defined Contribution Pension Risk and Mergers and Acquisitions: Evidence from United Kingdom
SSRN
The extant empirical evidence suggests that defined benefit (DB) pension obligations, deficits, and costs increase corporate leverage and cost of capital, reduce corporate investment and aggravate valuation uncertainties. In the M & A context, DB schemes of target firms may reduce the takeover likelihood and bidder DB schemes may influence payment currency choice and reduce shareholder value. However, the impact of defined contribution (DC) pension scheme risk on M & A has not been explicitly investigated so far inspite of the increasing and substantial shift from DB to DC schemes by firms. In a sample of 138 takeover bids for United Kingdom (UK) listed companies during 2002-12, we find that bidder and target DC costs decrease the likelihood of takeovers, influence percentage of cash and stock offered as consideration, and diminish shareholder value gains on merger announcements. Further, the negative economic impact of DC scheme risk on synergistic value from mergers is even larger than that of DB scheme risk. These results are robust to potential biases due to self-selection by merger partners and endogeneity of payment currency choice. Our analysis indicates that DC scheme risk significantly and pervasively affects the takeover decision, target selection, payment currency choice and shareholder wealth and should not be neglected in view of the growing trend away from DB to DC schemes.
SSRN
The extant empirical evidence suggests that defined benefit (DB) pension obligations, deficits, and costs increase corporate leverage and cost of capital, reduce corporate investment and aggravate valuation uncertainties. In the M & A context, DB schemes of target firms may reduce the takeover likelihood and bidder DB schemes may influence payment currency choice and reduce shareholder value. However, the impact of defined contribution (DC) pension scheme risk on M & A has not been explicitly investigated so far inspite of the increasing and substantial shift from DB to DC schemes by firms. In a sample of 138 takeover bids for United Kingdom (UK) listed companies during 2002-12, we find that bidder and target DC costs decrease the likelihood of takeovers, influence percentage of cash and stock offered as consideration, and diminish shareholder value gains on merger announcements. Further, the negative economic impact of DC scheme risk on synergistic value from mergers is even larger than that of DB scheme risk. These results are robust to potential biases due to self-selection by merger partners and endogeneity of payment currency choice. Our analysis indicates that DC scheme risk significantly and pervasively affects the takeover decision, target selection, payment currency choice and shareholder wealth and should not be neglected in view of the growing trend away from DB to DC schemes.
Transmission of Us and EU Economic Policy Uncertainty Shock to Asian Economies in Bad and Good Times
SSRN
This study empirically examines the fragility of five major Asian economies (China, Hong Kong, India, Japan, and South Korea) to economic policy uncertainty (EPU) of US and EU, and oil prices in different state of the economies. To investigate these dynamics, we use the relative tail dependence by means of the spillover index of Diebold and Yilmaz (2009, 2012) obtained from Quantile Vector Autoregressive (QVAR) model, a robust and semiparametric model, which does not require specification of the full distribution of error terms. The distinguishing feature of our approach from the previous studies is the determination of sign and intensity of asymmetric spillover dynamics from external shocks to Asian economies and variables covering a wide range of macroeconomic aspects.Our results indicate that the spillover indices from EPU and oil price shocks to Asian economies significantly vary across quantiles. The results from sub-sample analysis show that the US EPU has an asymmetric effect on macro variables of China, Hong Kong, and South Korea during the quantitative easing period (QE) and the reverse QE (RQE) periods while the EU EPU makes Asian markets vulnerable during the Eurozone debt crisis. The large-scale asset purchases (LSAPs) of ECB and BoJ seem to reduce Asian market fragilities after 2015. Last but not least, we get partial evidence to support an asymmetric effect of the crude oil shocks on some Asian markets.
SSRN
This study empirically examines the fragility of five major Asian economies (China, Hong Kong, India, Japan, and South Korea) to economic policy uncertainty (EPU) of US and EU, and oil prices in different state of the economies. To investigate these dynamics, we use the relative tail dependence by means of the spillover index of Diebold and Yilmaz (2009, 2012) obtained from Quantile Vector Autoregressive (QVAR) model, a robust and semiparametric model, which does not require specification of the full distribution of error terms. The distinguishing feature of our approach from the previous studies is the determination of sign and intensity of asymmetric spillover dynamics from external shocks to Asian economies and variables covering a wide range of macroeconomic aspects.Our results indicate that the spillover indices from EPU and oil price shocks to Asian economies significantly vary across quantiles. The results from sub-sample analysis show that the US EPU has an asymmetric effect on macro variables of China, Hong Kong, and South Korea during the quantitative easing period (QE) and the reverse QE (RQE) periods while the EU EPU makes Asian markets vulnerable during the Eurozone debt crisis. The large-scale asset purchases (LSAPs) of ECB and BoJ seem to reduce Asian market fragilities after 2015. Last but not least, we get partial evidence to support an asymmetric effect of the crude oil shocks on some Asian markets.
Villains or Scapegoats? The Role of Subprime Borrowers in Driving the U.S. Housing Boom
SSRN
An expansion in mortgage credit to subprime borrowers is widely believed to have been a principal driver of the 2002â€"2006 U.S. house price boom. By contrast, this paper documents a robust, negative correlation between the growth in the share of purchase mortgages to subprime borrowers and house price appreciation at the county-level during this time. Using two different instrumental variables approaches, we also establish causal evidence that house price appreciation lowered the share of purchase loans to subprime borrowers. Further analysis using micro-level credit bureau data shows that higher house price appreciation lowered the transition rate into first-time homeownership for subprime individuals. Finally, the paper documents that subprime borrowers did not play a significant role in the increased speculative activity and underwriting fraud that the literature has linked directly to the housing boom. Taken together, these results are more consistent with subprime borrowers being priced out of housing boom markets rather than inflating prices in those markets.
SSRN
An expansion in mortgage credit to subprime borrowers is widely believed to have been a principal driver of the 2002â€"2006 U.S. house price boom. By contrast, this paper documents a robust, negative correlation between the growth in the share of purchase mortgages to subprime borrowers and house price appreciation at the county-level during this time. Using two different instrumental variables approaches, we also establish causal evidence that house price appreciation lowered the share of purchase loans to subprime borrowers. Further analysis using micro-level credit bureau data shows that higher house price appreciation lowered the transition rate into first-time homeownership for subprime individuals. Finally, the paper documents that subprime borrowers did not play a significant role in the increased speculative activity and underwriting fraud that the literature has linked directly to the housing boom. Taken together, these results are more consistent with subprime borrowers being priced out of housing boom markets rather than inflating prices in those markets.
