Does capital markets uncertainty affect the business cycle? We find that financial volatility predicts 30% of post-war economic activity in the United States, and that during the Great Moderation, aggregate stock market volatility explains, alone, up to 55% of real growth. In out-of-sample tests, we find that stock volatility helps predict turning points over and above traditional financial variables such as credit or term spreads, and other leading indicators. Combining stock volatility and the term spread leads to a proxy for (i) aggregate risk, (ii) risk-premiums and (iii) monetary policy, which is found to track, and anticipate, the business cycle. At the heart of our analysis is a notion of volatility based on a slowly changing measure of return variability. This volatility is designed to capture long-run uncertainty in capital markets, and is particularly successful at explaining trends in the economic activity at horizons of six months and one year.
{"title":"Financial Volatility and Economic Activity","authors":"F. Fornari, A. Melé","doi":"10.2139/ssrn.1501168","DOIUrl":"https://doi.org/10.2139/ssrn.1501168","url":null,"abstract":"Does capital markets uncertainty affect the business cycle? We find that financial volatility predicts 30% of post-war economic activity in the United States, and that during the Great Moderation, aggregate stock market volatility explains, alone, up to 55% of real growth. In out-of-sample tests, we find that stock volatility helps predict turning points over and above traditional financial variables such as credit or term spreads, and other leading indicators. Combining stock volatility and the term spread leads to a proxy for (i) aggregate risk, (ii) risk-premiums and (iii) monetary policy, which is found to track, and anticipate, the business cycle. At the heart of our analysis is a notion of volatility based on a slowly changing measure of return variability. This volatility is designed to capture long-run uncertainty in capital markets, and is particularly successful at explaining trends in the economic activity at horizons of six months and one year.","PeriodicalId":47599,"journal":{"name":"European Journal of Finance","volume":null,"pages":null},"PeriodicalIF":2.5,"publicationDate":"2009-11-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76408834","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The management sciences are largely based on the figure of an economic agent who seeks to maximise his or her own individual interests, in the same way as the celebrated homo economicus. The whole corpus of finance relies on this fundamental hypothesis. However, developments in this field, as well as in the neighbouring field of marketing, in the last decade reflect the effects of collective actors or actors whose motives are more collective than individual. This paper describes those developments and proposes to make new progress in this direction by offering a critical reading of the role and place of financial markets.
{"title":"Marketing The Individual-Collective Dialectic in Management Sciences: A Re-Reading Based on the Interpellation of Finance from a Marketing Perspective (La Dialectique Individu-Collectif En Sciences De Gestion: Une Relecture Au Travers De L’Interpellation De La Finance Par Le)","authors":"B. Cova, Bernard Paranque","doi":"10.2139/ssrn.1500990","DOIUrl":"https://doi.org/10.2139/ssrn.1500990","url":null,"abstract":"The management sciences are largely based on the figure of an economic agent who seeks to maximise his or her own individual interests, in the same way as the celebrated homo economicus. The whole corpus of finance relies on this fundamental hypothesis. However, developments in this field, as well as in the neighbouring field of marketing, in the last decade reflect the effects of collective actors or actors whose motives are more collective than individual. This paper describes those developments and proposes to make new progress in this direction by offering a critical reading of the role and place of financial markets.","PeriodicalId":47599,"journal":{"name":"European Journal of Finance","volume":null,"pages":null},"PeriodicalIF":2.5,"publicationDate":"2009-11-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82581344","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using detailed ownership data for a sample of European commercial banks, we analyze the link between ownership structure and risk in both privately owned and publicly held banks. We consider five categories of shareholders that are specific to our dataset. We find that ownership structure is significant in explaining risk differences but mainly for privately owned banks. A higher equity stake of either individuals/families or banking institutions is associated with a decrease in asset risk and default risk. In addition, institutional investors and non-financial companies impose the riskiest strategies when they hold higher stakes. For publicly held banks, changes in ownership structure do not affect risk taking. Market forces seem to align the risk-taking behavior of publicly held banks, such that ownership structure is no longer a determinant in explaining risk differences. However, higher stakes of banking institutions in publicly held banks are associated with lower credit and default risk.
{"title":"Ownership Structure and Risk in Publicly Held and Privately Owned Banks","authors":"T. Barry, L. Lepetit, Amine Tarazi","doi":"10.2139/ssrn.1460703","DOIUrl":"https://doi.org/10.2139/ssrn.1460703","url":null,"abstract":"Using detailed ownership data for a sample of European commercial banks, we analyze the link between ownership structure and risk in both privately owned and publicly held banks. We consider five categories of shareholders that are specific to our dataset. We find that ownership structure is significant in explaining risk differences but mainly for privately owned banks. A higher equity stake of either individuals/families or banking institutions is associated with a decrease in asset risk and default risk. In addition, institutional investors and non-financial companies impose the riskiest strategies when they hold higher stakes. For publicly held banks, changes in ownership structure do not affect risk taking. Market forces seem to align the risk-taking behavior of publicly held banks, such that ownership structure is no longer a determinant in explaining risk differences. However, higher stakes of banking institutions in publicly held banks are associated with lower credit and default risk.","PeriodicalId":47599,"journal":{"name":"European Journal of Finance","volume":null,"pages":null},"PeriodicalIF":2.5,"publicationDate":"2009-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"75994378","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The paper first analyzes where France stands in the global picture, and then describes how it is trying to keep the current financial crisis in check. The 2008 French Bank Relief Act created both a financing company and a recapitalization company to help financial institutions via a government guarantee. Other interventions, which were structural, include the reform of securitization, hedge funds, and rules for executive compensation. Finally, the paper proposes a few paths for the future.
{"title":"French Interventions in the Financial Crisis","authors":"Georges A. J. Cavalier","doi":"10.2139/SSRN.1492708","DOIUrl":"https://doi.org/10.2139/SSRN.1492708","url":null,"abstract":"The paper first analyzes where France stands in the global picture, and then describes how it is trying to keep the current financial crisis in check. The 2008 French Bank Relief Act created both a financing company and a recapitalization company to help financial institutions via a government guarantee. Other interventions, which were structural, include the reform of securitization, hedge funds, and rules for executive compensation. Finally, the paper proposes a few paths for the future.","PeriodicalId":47599,"journal":{"name":"European Journal of Finance","volume":null,"pages":null},"PeriodicalIF":2.5,"publicationDate":"2009-10-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90422521","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Almost one year after financial market turmoil triggered a financial and economic crisis in the countries of the European Union (EU), many reforms of the financial sector are still not in place and destabilising practices are continuing. Political agreements at several high-level international and European meetings still need to become legally binding through EU directives and the subsequent incorporation into national laws. Will the financial sector reforms currently proposed at the EU level guarantee financial stability and protect the real economy from financial speculators? More importantly, will they create financial instruments at the service of the public interest and sustainable societies, and tackle the systemic causes that also are related to the food, environmental and poverty crisis? This briefing provides a critical analysis of a selection of the European financial reforms that are being discussed and decided upon in the second half of 2009 and beyond. An in-depth explanation of the EU financial reform proposals that are discussed in this paper, as well as the terminology and the political decision-making processes at EU level, can be found in: “An Oversight of Selected Financial Reforms on the EU agenda” (See on the SOMO website online).
{"title":"The Deficits of the EU Financial Reforms","authors":"Myriam Vander Stichele, T. Kerckhoffs","doi":"10.2139/SSRN.1491031","DOIUrl":"https://doi.org/10.2139/SSRN.1491031","url":null,"abstract":"Almost one year after financial market turmoil triggered a financial and economic crisis in the countries of the European Union (EU), many reforms of the financial sector are still not in place and destabilising practices are continuing. Political agreements at several high-level international and European meetings still need to become legally binding through EU directives and the subsequent incorporation into national laws. Will the financial sector reforms currently proposed at the EU level guarantee financial stability and protect the real economy from financial speculators? More importantly, will they create financial instruments at the service of the public interest and sustainable societies, and tackle the systemic causes that also are related to the food, environmental and poverty crisis? This briefing provides a critical analysis of a selection of the European financial reforms that are being discussed and decided upon in the second half of 2009 and beyond. An in-depth explanation of the EU financial reform proposals that are discussed in this paper, as well as the terminology and the political decision-making processes at EU level, can be found in: “An Oversight of Selected Financial Reforms on the EU agenda” (See on the SOMO website online).","PeriodicalId":47599,"journal":{"name":"European Journal of Finance","volume":null,"pages":null},"PeriodicalIF":2.5,"publicationDate":"2009-09-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82832795","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study investigates the effects of governance characteristics on debt financing costs for listed French companies using corporate governance guidelines issued during the late nineties. Although the French system is strongly debt-oriented, creditor legal protection is weak and financial institutions have few direct internal monitoring channels (i.e., presence on the Board of Directors). We postulate, therefore, that they value the quality of corporate governance when determining loan conditions. Using a 1999-2001 sample of large, non-financial listed companies, we find an inverse relation between the ex post cost of debt and three corporate governance quality attributes: (1) Board independence, (2) the existence of a compensation committee composed of non-executive directors, and (3) the presence of significant institutional shareholders in the firm’s equity. However, the existence of an independent audit committee provides no significant benefits. These results are robust to firm size effects and to a large set of firm-specific characteristics. This study provides empirical support for the benefits of more effective monitoring of debtholders’ agency risk, but does not support accounting-auditing monitoring benefits regarding debtholders’ information risk. This might be explained by the very limited use of debt covenants in France at the time of the study. This study offers insights to financial institutions for benchmarking the quality of borrowers’ corporate governance, and in creating more optimal contract provisions in loan agreements. It also provides suggestions for corporate officers in the negotiation of interest rates with lenders.
{"title":"Corporate Governance Reform and the Cost of Debt Financing of Listed French Companies","authors":"Charles Piot, Franck Missonier-Piera","doi":"10.2139/ssrn.960681","DOIUrl":"https://doi.org/10.2139/ssrn.960681","url":null,"abstract":"This study investigates the effects of governance characteristics on debt financing costs for listed French companies using corporate governance guidelines issued during the late nineties. Although the French system is strongly debt-oriented, creditor legal protection is weak and financial institutions have few direct internal monitoring channels (i.e., presence on the Board of Directors). We postulate, therefore, that they value the quality of corporate governance when determining loan conditions. Using a 1999-2001 sample of large, non-financial listed companies, we find an inverse relation between the ex post cost of debt and three corporate governance quality attributes: (1) Board independence, (2) the existence of a compensation committee composed of non-executive directors, and (3) the presence of significant institutional shareholders in the firm’s equity. However, the existence of an independent audit committee provides no significant benefits. These results are robust to firm size effects and to a large set of firm-specific characteristics. This study provides empirical support for the benefits of more effective monitoring of debtholders’ agency risk, but does not support accounting-auditing monitoring benefits regarding debtholders’ information risk. This might be explained by the very limited use of debt covenants in France at the time of the study. This study offers insights to financial institutions for benchmarking the quality of borrowers’ corporate governance, and in creating more optimal contract provisions in loan agreements. It also provides suggestions for corporate officers in the negotiation of interest rates with lenders.","PeriodicalId":47599,"journal":{"name":"European Journal of Finance","volume":null,"pages":null},"PeriodicalIF":2.5,"publicationDate":"2009-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83856706","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The risk free rate is one of the most often used data series in empirical tests of financial theories. This paper discusses issues in calculating risk free rates from the money market instruments, especially for tests of asset pricing models and event studies. Special attention is given to situations where the maturity of the money market instruments does not match that of the other assets under investigation. This situation typically arises when one has to calculate risk free rates of return for periods shorter (e.g., a day or a week) than the shortest available market rates (e.g., one month) or when the available instruments are issued periodically (e.g., once a week) with fixed maturity.
{"title":"On the Calculation of the Risk Free Rate for Tests of Asset Pricing Models","authors":"M. Vaihekoski","doi":"10.2139/ssrn.958471","DOIUrl":"https://doi.org/10.2139/ssrn.958471","url":null,"abstract":"The risk free rate is one of the most often used data series in empirical tests of financial theories. This paper discusses issues in calculating risk free rates from the money market instruments, especially for tests of asset pricing models and event studies. Special attention is given to situations where the maturity of the money market instruments does not match that of the other assets under investigation. This situation typically arises when one has to calculate risk free rates of return for periods shorter (e.g., a day or a week) than the shortest available market rates (e.g., one month) or when the available instruments are issued periodically (e.g., once a week) with fixed maturity.","PeriodicalId":47599,"journal":{"name":"European Journal of Finance","volume":null,"pages":null},"PeriodicalIF":2.5,"publicationDate":"2009-08-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81900443","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We investigate the link between account activity and information production on borrower quality. Based on a unique data set, we find that credit line usage, limit violations, and cash inflows exhibit abnormal patterns approximately 12 months before default events. Measures of account activity substantially improve default predictions and are especially helpful for monitoring small businesses and individuals. We also find that the early warning indications from account activity result in higher loan spreads, and in a higher likelihood of limit reductions and complete write-offs. Our results highlight that the information on account activity provides banks with a real-time window into the borrower’s cash flows, creating a unique advantage over non-bank lenders and capital markets.
{"title":"Credit Line Usage, Checking Account Activity, and Default Risk of Bank Borrowers","authors":"Lars Norden, Martin Weber","doi":"10.1093/RFS/HHQ061","DOIUrl":"https://doi.org/10.1093/RFS/HHQ061","url":null,"abstract":"We investigate the link between account activity and information production on borrower quality. Based on a unique data set, we find that credit line usage, limit violations, and cash inflows exhibit abnormal patterns approximately 12 months before default events. Measures of account activity substantially improve default predictions and are especially helpful for monitoring small businesses and individuals. We also find that the early warning indications from account activity result in higher loan spreads, and in a higher likelihood of limit reductions and complete write-offs. Our results highlight that the information on account activity provides banks with a real-time window into the borrower’s cash flows, creating a unique advantage over non-bank lenders and capital markets.","PeriodicalId":47599,"journal":{"name":"European Journal of Finance","volume":null,"pages":null},"PeriodicalIF":2.5,"publicationDate":"2009-08-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73071818","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
J. Bikker, Dirk Broeders, D. Hollanders, Eduard H. M. Ponds
This paper examines the impact of participants’ age distribution on the asset allocation of Dutch pension funds, using a unique data set of pension fund investment plans for 2007. Theory predicts a negative effect of age on (strategic) equity exposures. We observe that pension funds do indeed take the average age of their participants into account. However, the average age of active participants has been incorporated much more strongly in investment behaviour than the average ages of retired or dormant participants. This suggests that both employers and employees, who dominate pension fund boards, tend to show more interest in active participants. A one-year higher average age in active participants leads to a significant and robust reduction in the strategic equity exposure by around 0.5 percentage point. Larger pension funds show a stronger age-equity exposure effect than smaller pension funds. This age-dependent asset allocation of pension funds aligns with the original life-cycle model by which young workers should invest more in equity than older workers because of their larger human capital. Other factors, viz. fund size, funding ratio, and average pension wealth of participants, influence equity exposure positively and significantly, in line with theory. Pension plan type and pension fund type have no significant impact.
{"title":"Pension Funds’ Asset Allocation and Participant Age: A Test of the Life-Cycle Model","authors":"J. Bikker, Dirk Broeders, D. Hollanders, Eduard H. M. Ponds","doi":"10.2139/ssrn.1460586","DOIUrl":"https://doi.org/10.2139/ssrn.1460586","url":null,"abstract":"This paper examines the impact of participants’ age distribution on the asset allocation of Dutch pension funds, using a unique data set of pension fund investment plans for 2007. Theory predicts a negative effect of age on (strategic) equity exposures. We observe that pension funds do indeed take the average age of their participants into account. However, the average age of active participants has been incorporated much more strongly in investment behaviour than the average ages of retired or dormant participants. This suggests that both employers and employees, who dominate pension fund boards, tend to show more interest in active participants. A one-year higher average age in active participants leads to a significant and robust reduction in the strategic equity exposure by around 0.5 percentage point. Larger pension funds show a stronger age-equity exposure effect than smaller pension funds. This age-dependent asset allocation of pension funds aligns with the original life-cycle model by which young workers should invest more in equity than older workers because of their larger human capital. Other factors, viz. fund size, funding ratio, and average pension wealth of participants, influence equity exposure positively and significantly, in line with theory. Pension plan type and pension fund type have no significant impact.","PeriodicalId":47599,"journal":{"name":"European Journal of Finance","volume":null,"pages":null},"PeriodicalIF":2.5,"publicationDate":"2009-08-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80373556","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
By using an existing and a new convergence measure, this paper assesses whether bank loan and bond interest rates are converging for the non-financial corporate sector across the euro area. Whilst we find evidence for complete bond market integration, the market for bank loans remains segmented, albeit to various degrees depending on the type and size of the loan. Factor analysis reveals that rates on large loans and small loans with long rate fixation periods have weakly converged in the sense that, up to a fixed effect, their evolution is driven by common factors only. In contrast, the price evolution of small loans with short rate fixation periods is still affected by country-specific dynamic factors. There are few signs that bank loan rates are becoming more uniform with time.
{"title":"A Factor Analysis Approach to Measuring European Loan and Bond Market Integration","authors":"Rien J. L. M. Wagenvoort, Andrea Ebner, M. Borys","doi":"10.2139/ssrn.1460831","DOIUrl":"https://doi.org/10.2139/ssrn.1460831","url":null,"abstract":"By using an existing and a new convergence measure, this paper assesses whether bank loan and bond interest rates are converging for the non-financial corporate sector across the euro area. Whilst we find evidence for complete bond market integration, the market for bank loans remains segmented, albeit to various degrees depending on the type and size of the loan. Factor analysis reveals that rates on large loans and small loans with long rate fixation periods have weakly converged in the sense that, up to a fixed effect, their evolution is driven by common factors only. In contrast, the price evolution of small loans with short rate fixation periods is still affected by country-specific dynamic factors. There are few signs that bank loan rates are becoming more uniform with time.","PeriodicalId":47599,"journal":{"name":"European Journal of Finance","volume":null,"pages":null},"PeriodicalIF":2.5,"publicationDate":"2009-08-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77872553","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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