This paper proposes a simple method to estimate contingent liabilities that arise from (implicit and explicit) government guarantees to the banking sector. This method allows us to construct cross-country estimates on potential costs of bank failures. Furthermore, we empirically test whether the contingent liabilities from the banking sector is a significant determinant of sovereign risk based on the data from 32 countries. Our results suggest that a 1% of GDP increase in contingent liabilities is associated with an increase in sovereign CDS spreads of 24 basis points in advanced countries and 75 basis points in emerging economies.
{"title":"Contingent Liabilities and Sovereign Risk: Evidence from Banking Sectors","authors":"Serkan Arslanalp, Yin Liao","doi":"10.2139/ssrn.2142437","DOIUrl":"https://doi.org/10.2139/ssrn.2142437","url":null,"abstract":"This paper proposes a simple method to estimate contingent liabilities that arise from (implicit and explicit) government guarantees to the banking sector. This method allows us to construct cross-country estimates on potential costs of bank failures. Furthermore, we empirically test whether the contingent liabilities from the banking sector is a significant determinant of sovereign risk based on the data from 32 countries. Our results suggest that a 1% of GDP increase in contingent liabilities is associated with an increase in sovereign CDS spreads of 24 basis points in advanced countries and 75 basis points in emerging economies.","PeriodicalId":154671,"journal":{"name":"Special Issue: Systemic Risk 4","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114883041","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Recently, the role of safe-haven currency has become increasingly remarkable: in the time of stress, uncertainty aversion drives investors to shun the risky currencies and fly for quality. The currency that serves as a safe haven also acts as the benchmark for performance measurement. In this paper we explore what contributes to a safe-haven or benchmark image of currency in turbulence. By comparing floating rates to band-regime ones, strong base currencies to weak ones, and the base currencies with different market shares, we find that the benchmarking role primarily comes from currency' strength measured by interest rate differential. However a low interest rate is not sufficient. A trustworthy currency also has large share in FX markets as well, and in this sense our safe-haven effect is not a pure carry-trade-cycle effect. The exchange-rate regime seems to matter the least. Besides, we find that consistent with the idea that reputation comes from a slow-moving effect, the safe-haven evidence is especially present in the long-run-trend component of the forwardpremium.
{"title":"The Safe-Haven Effect in Forward Premia: What Makes a Currency Trustworthy?","authors":"Fangda Liu, P. Sercu","doi":"10.2139/ssrn.2136698","DOIUrl":"https://doi.org/10.2139/ssrn.2136698","url":null,"abstract":"Recently, the role of safe-haven currency has become increasingly remarkable: in the time of stress, uncertainty aversion drives investors to shun the risky currencies and fly for quality. The currency that serves as a safe haven also acts as the benchmark for performance measurement. In this paper we explore what contributes to a safe-haven or benchmark image of currency in turbulence. By comparing floating rates to band-regime ones, strong base currencies to weak ones, and the base currencies with different market shares, we find that the benchmarking role primarily comes from currency' strength measured by interest rate differential. However a low interest rate is not sufficient. A trustworthy currency also has large share in FX markets as well, and in this sense our safe-haven effect is not a pure carry-trade-cycle effect. The exchange-rate regime seems to matter the least. Besides, we find that consistent with the idea that reputation comes from a slow-moving effect, the safe-haven evidence is especially present in the long-run-trend component of the forwardpremium.","PeriodicalId":154671,"journal":{"name":"Special Issue: Systemic Risk 4","volume":"25 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-08-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131993668","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper develops a model of banking frictions and banking risk. As a sort of systemic risk, changes in banking risk lead to fluctuations in aggregate economic activity. We decompose the macroeconomic effect of a banking risk shock into a pure default effect and a risk-aversion effect when risk sharing among investors is imperfect. When the shock generates a bank risk spread similar to the peak value during the Global Financial Crisis, the overall effect is a decline in employment by 4.66%. The default effect leads to a 3.40% employment decline by a “within-model” measure, and a 3.51 decline by a “between-model” measure. The remaining is attributed to the risk-aversion effect. A practical implication of our analysis is that by developing financial safety net and improving risk sharing among investors, the society can mitigate the adverse macroeconomic effects of banking risk shocks to some extent, but cannot eliminate all of them.
{"title":"Banking Risk and Macroeconomic Fluctuations","authors":"Yi Jin, Zhixiong Zeng","doi":"10.2139/ssrn.2136699","DOIUrl":"https://doi.org/10.2139/ssrn.2136699","url":null,"abstract":"This paper develops a model of banking frictions and banking risk. As a sort of systemic risk, changes in banking risk lead to fluctuations in aggregate economic activity. We decompose the macroeconomic effect of a banking risk shock into a pure default effect and a risk-aversion effect when risk sharing among investors is imperfect. When the shock generates a bank risk spread similar to the peak value during the Global Financial Crisis, the overall effect is a decline in employment by 4.66%. The default effect leads to a 3.40% employment decline by a “within-model” measure, and a 3.51 decline by a “between-model” measure. The remaining is attributed to the risk-aversion effect. A practical implication of our analysis is that by developing financial safety net and improving risk sharing among investors, the society can mitigate the adverse macroeconomic effects of banking risk shocks to some extent, but cannot eliminate all of them.","PeriodicalId":154671,"journal":{"name":"Special Issue: Systemic Risk 4","volume":"38 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-08-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121282979","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Employing a broad sample of US firms over the period 1962 to 2009, we provide evidence of a liquidity risk impact on the fundamental earnings-returns relation. Specifically, we document that current liquidity risk has a positive moderating effect on the relation between current returns and next period change in earnings. Notably, this effect is distinct from (and after controlling for) the negative effect observed for illiquidity level (Kerr, Sadka and Sadka, 2012). We further show that the liquidity risk effect on the earnings-returns relation is dominant in firms that: (a) are of intermediate size; (b) are of intermediate book-to-market; and (c) are profitable.
{"title":"Liquidity Risk and Cross-Sectional Earnings-Returns Relation","authors":"Zangina Isshaq, R. Faff","doi":"10.2139/ssrn.2130219","DOIUrl":"https://doi.org/10.2139/ssrn.2130219","url":null,"abstract":"Employing a broad sample of US firms over the period 1962 to 2009, we provide evidence of a liquidity risk impact on the fundamental earnings-returns relation. Specifically, we document that current liquidity risk has a positive moderating effect on the relation between current returns and next period change in earnings. Notably, this effect is distinct from (and after controlling for) the negative effect observed for illiquidity level (Kerr, Sadka and Sadka, 2012). We further show that the liquidity risk effect on the earnings-returns relation is dominant in firms that: (a) are of intermediate size; (b) are of intermediate book-to-market; and (c) are profitable.","PeriodicalId":154671,"journal":{"name":"Special Issue: Systemic Risk 4","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-08-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121667908","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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