The Banking and Finance Review

Banking Sector Strength and the Volatility of Cross-Listed Securities

2022-11-30T03:40:32-06:00

This paper tests the effect of banking sector strength on the volatility of American depository receipts (ADRs) listed on major U.S. exchanges. Prior research suggests that when banking systems are fragile, financial capital markets experience higher volatility. In this paper, we examine whether firms operating in countries with more stable banking systems experience less volatile equity prices.

Using panel regressions based on a broad dataset of ADRs from 43 countries, we analyze whether cross-listed securities from more solid banking systems are associated with a lower degree of volatility. Using our ADR-year panel dataset, we apply OLS regressions to study how the following country-level variables affect ADR volatility: Bank Capital/Total Assets, Bank Deposits/GDP, Bank Z Score, and Central Bank Assets/GDP.

Our results confirm that there is such a relationship, with the deposits/GDP ratio of the home country, in particular, playing a central role in alleviating ADRs’ volatility. This calming effect holds for different measures of volatility and under different regression specifications and control variables.

Our results suggest that countries with more stable banking sectors are likely to enjoy lower levels of stock price volatility for banking entities. This paper provides new insights for both academics and practitioners dealing with the stability of asset prices, and may also be of interest to regulators, banking supervisors, and central banks seeking to preserve and promote the stability of both the banking and capital markets systems.

U.S. State Politics and Bank Performance

2023-03-03T07:42:17-06:00

The goal of this research is to examine the impact of politics in all 50 U.S. states on bank performance over the period of 1999-2021. Prior to this study, the impact of politics on bank performance was examined by one paper on the Federal level as it pertained to political affiliation of the U.S. president and the party in control of the Congress and by another paper that looked at politics on the state level but the time span for was limited to one year that marked the onset of the Covid pandemic. The findings of this research show that which of the two political parties controls the governorship and whether a single political party controls both the governorship and the house legislature impacts bank performance within states. Research shows that republican control of the governorship is associated with higher bank profitability, liquidity and capital adequacy but lower asset quality. Additionally, when a single party controls both the governor’s mansion and the legislative majority, banks produce lower profits, and similarly to the results for the republican governors, higher levels of liquidity and capital, but lower levels of asset quality.

Premium, tracking errors and performance of iShares Core versus ESG S&P ETFs

2023-05-28T05:33:18-05:00

As documented in the “Trends in Investing Survey” reports from 2018 through 2022 by the Financial Planning Association (FPA), financial advisers have increasingly recommended and used ETFs and ESG themed assets in their clients’ portfolios. However, such preference towards the ETFs and ESG assets needs to be carefully analyzed and interpreted by the financial advisors to determine their suitability for client portfolios. It is in this backdrop, this paper aims to understand the behavior of a sample of three ETFs and three related ESG ETFs which are designed to track the overall US large–, mid– and small–cap markets. Daily and weekly data from September 2020 through August 2022 are used to examine and compare tracking errors, premium, discount and performance of these ETFs. The results show that, on average, ESG ETFs have higher tracking errors and premium than ESG ETFs. These findings question the ability of the ESG ETFs to achieve pricing and tracking efficiency compared to their corresponding core ETFs. On a risk–adjusted basis, core ETFs have delivered better performance than their ESG counterparts. Also, Small–cap ETFs, both core and ESG themed, have achieved best risk – adjusted returns followed by the mid– ap ETFs and then, the large–cap ETFs. Compared with the benchmark returns, no ETFs in the sample were able to achieve significant abnormal returns. The findings of the paper would help financial advisers ensure compliance with suitability while making investment advice to their clients that are interested to add ETFs and ESG assets in their portfolios.

Bank networks and systemic risk

2023-03-03T07:41:18-06:00

The economic analysis of bank networks and systemic risk is an important issue for academics, policy makers and stakeholders. This paper proposes an analytical approach based on Freixas et al (2000) by using game theory and network graphs, where banks are represented by nodes and the credit lines by links. Additionally, this paper proposes a modeling where the principal result is the debt distribution of one insolvent bank in the bank network with the objective to maintain the bank system integrity in the event of a bank’s insolvency. Two risk scenarios in the bank networks are analyzed: one with a diversified regime and another with a less resilient regime. In the first case, when all banks are solvent, there is not systemic risk contagion. In the second case, when one bank is insolvent and has liquidity problems, a mechanism is implemented to resume control over systemic risk contagion and operate with normality provided that the rest of the bank network could cover insolvent bank credit lines. The second result of this paper is to propose a control mechanism and a systemic risk parameter that helps in preventing systemic risk in a bank network by adjusting money velocity. This adjustment helps reduce social costs losses, which are associated with financial and real economic crises.

Investigating the Relationship between Business Sector Returns in the Japanese Stock Market and its Impact on Forecasting Returns by CNN-LSTM.

2023-03-03T07:16:15-06:00

This study investigates the relationship between business sector returns and stock price forecasting in the Japanese stock market. First, we employ the vector autoregression with exogenous variables (VARX) and the Granger causality test to analyze inter-sectoral linkages and their impact on sectoral returns. We propose a hybrid machine learning approach, the CNN-LSTM model, which incorporates the abovementioned assumptions for improved prediction performance. Our findings indicate that considering inter-sectoral relationships enhances the accuracy of stock price forecasting.

Does Economic Policy Uncertainty Move the Market? An Econometric Analysis of Stock Market Volatility and Uncertainty Indices

2023-10-01T01:59:13-05:00

This paper examines the relationship between stock market volatility and economic policy uncertainties in financial, economic and political realms. We select eight policy related uncertainty indices developed by Baker, Bloom and Davis (2016) and subject them to causality tests to determine their utility in forecasting stock market volatility, as measured by volatility index (VIX). Of the eight indices, five are found to possess predictive causality. We then develop a distributed lag (DL) model to assess the explanatory powers of each of the indices. Based on the DL model, we run impulse response analyses for each variable to observe the stock market’s reaction over time to policy uncertainty shocks. The econometric analyses of this paper reveal how market volatility is an increasing function of the product of economic uncertainty. In a less technical way, our findings show that the stock market is an informative gauge to understand the cost of policy uncertainty.

JEL classifications: G12; E6

Keywords: Stock Market Volatility, Economic Policy Uncertainty, Policy Indices, VIX

The Effect of Corporate Governance on Firm Performance in Jordan

2023-12-24T02:44:32-06:00

This paper aims to contribute to prior literature through analyzing the impact of corporate governance on the firm financial performance for a sample of 82 non-financial firms listed on Amman Stock Exchange (ASE). CEO-duality, board independence, size of the board, concentrated ownership, composition of the board (gender), composition of the board (nationality), and board meetings are articulated as the independent variables, while accounting-based proxies (ROA and ROE) and market-based measures (Tobin’s Q and Market share) are applied to measure firm performance. Fixed effect and random effects models are utilized using related data from ASE for the period 2015-2019. We find a positive correlation of board size, board composition (gender), and board independence and market valuation tools (Market share and Tobin’s Q). Similarly, a positive relationship was observed between board independence, CEO duality, and frequency of board meeting and the accounting-based measures. Concentrated ownership had a negative impact on ROA alone. Finally, board composition (nationality) and CEO duality negatively affect the market-based measures.