Research articles for the 2020-10-10

A Composite Measure of Financial Inclusion in Nigeria (1992 - 2019): A Principal Component Analysis Approach
Inyang, Isaac,Omini, Eko,Bekun, Festus
Owing to gaps in the literature regarding the dearth of a robust and an all-inclusive measurement of Financial Inclusion, this study gauges the level of financial inclusion for Nigeria. Adopting the use of the PCA as an indexing mechanism, the study condenses 22 selected aggregate indicators into a single comprehensive static that can serve as a measurement of financial inclusion for the Nigerian economy. The selected indicators comprises not only indicators germane to the banking sector, which has become traditional in other studies but advances its investigation to include the contribution of previously neglected indicators that captures other sub-sectors (like Insurance and Mortgage) and financial markets (like Stock market) that constitutes the financial system. In a two-stage PCA analysis, the results indicate that the non-bank sectors contribute more to the supply of financial services in Nigeria than the banking sector. The results also suggest that the demand for financial services in urban centres outmatches that of the more populated rural areas. Generally, the results indicate a slow and sluggish rise in Financial Inclusion for the duration of the study scope. Hence, the study recommends that effort be made to collating demand-side data as available data is restrictive. The study also recommends that policies and programmes with the specific aim to increasing available points of service in rural settings be pursued should financial authorities hope to meet stated goals.

Backtesting Macroprudential Stress Tests
Ramadiah, Amanah,Fricke, Daniel,Caccioli, Fabio
In this paper, we consider models of price-mediated contagion in a banking network of common asset holdings. For these models, the literature proposed two alternative classes of liquidation dynamics: threshold dynamics (banks liquidate their investment portfolios only after they have defaulted), and leverage targeting dynamics (banks constantly rebalance their portfolios to maintain a target leverage ratio). We introduce a one-parameter family of non-linear liquidation functions that interpolates between these two extremes. We then test the capability of these models to predict actual bank defaults (and survivals) in the United States for the years 2008-10. We show that the model performance depends on the type of shock being imposed (idiosyncratic versus systematic). We identify the two most relevant asset classes, for which the model has predictive power when these asset classes are exposed to an initial shock. In these cases, the model performs better than alternative benchmarks that do not account for the network of common asset holdings, irrespective of the assumed liquidation dynamics. We also show how the best performing liquidation dynamics depend on the combination of the initial shock level and the market impact parameter, on the cross-sectional variation in the market impact parameter, and on the number of asset liquidation rounds.

Economic Policy Uncertainty and Board Monitoring: Evidence from CEO Turnovers
Frye, Melissa B.,Pham, Duong
We examine whether economic policy uncertainty (EPU) affects a board’s chief executive officer (CEO) replacement decision. We find that high EPU reduces the likelihood of forced CEO turnover. Our results support the idea that performance assessment may be more difficult when uncertainty is high. We provide evidence that succession planning may be important to firms in reducing the effects of EPU, as firms with an identifiable heir apparent are not influenced by high EPU. Likewise, voluntary CEO turnovers are not affected by EPU. Overall, our results provide evidence that boards make personnel decisions in response to external macroeconomic pressures.

Non-Performing Loans: Logit Model Applications
Orlando, Giuseppe,Pelosi, Roberta
Within bank activities, which is normally defined as the joint exercise of savings collection and credit supply risk-taking is physiological, as for a lot of human activities. Among risks related to credit inter-mediation, credit risk assumes particular importance. It is most simply defined as the potential that a bank borrower or counter party fail to fulfill correctly at maturity the pecuniary obligations assumed as principal and interest. Whenever this happens, a loan is non-performing. Among the main risk’s components, the Probability to Default and the Loss Given Default have been the subject of greater interest for research. In this paper, logit model is used to predict both the component. Financial ratios are used predicting PD. Time of recovery and presence of collateral are used to predict LGD.

On the Dependence Between Default Risk and Recovery Rates in Structural Models
Fermanian, Jean-David
We define several concepts of dependence between default risk and recovery risk, in a factor model framework. These concepts are illustrated and compared from the perspective of structural models: Merton (1974)’s single horizon and single firm model, multi-factor extensions, possibly under a portfolio approach. Some first-passage time models are discussed too: Kou’s (2002) model and some of its extensions, in particular by adding self-exciting features. We evaluate the different concepts of “default/recovery” dependencies analytically when it is possible, otherwise by simulation.

Repurchase Options in the Market for Lemons
Bigio, Saki,SHI, LIYAN
We study repurchase options (repo contracts) in a competitive asset market with asymmetric information. Gains from trade emerge from a liquidity need, but private information about asset quality prevents the full realization of trade. We obtain a unique equilibrium, which features a pooling repo contract and full participation among borrowers. The equilibrium repo contract resolves adverse selection: the embedded repurchase option prevents the market unraveling that occurs in asset-sale markets. However, the contract is inefficient due to cream skimming. Competition to attract high-quality borrowers through the terms of the repurchase option inefficiently lowers liquidity. The equilibrium contract has a closed form and is portable to many applications.

Upper Echelons Theory, Conservative Chairmen and Informative Earnings Management
Arioglu, Emrah
The current study focuses on the conservatism levels of provinces of birth of company chairmen to investigate whether public companies quoted at the Borsa Istanbul between the 2009 and 2017 engage in earnings management with an informative intent. Turkey provides a unique setting to investigate the issue in hand since the common ownership structures of public companies and laws and regulations are not likely to provide corporate executives with a high motivation to manage earnings in an opportunistic manner. The findings demonstrate that the level of chairmen conservatism has a positive effect on income-increasing discretionary current accruals. In addition, company performance in the subsequent years are positively associated with discretionary current accruals. Overall, the findings suggest that companies quoted at the Borsa Istanbul appear to be engaged in earnings management with an informative intent. The findings are robust to various conservatism proxies and model specifications.