Pub Date : 2024-12-01DOI: 10.1016/j.qref.2024.101941
Yongkui Li , Qixuan Du , Xiangrui Chao , Xiang Gao
This study examines the influence of macro-prudential policies on risk-taking among systemically important banks using unbalanced panel data from 126 commercial banks in China between 2010 and 2021. Under a difference-in-differences setup, the empirics demonstrate that macro prudence in China effectively enhances large banks’ risk prevention measures and risk-mitigation efforts. Specifically, macro-prudential policy implementation facilitates the digital transformation of banking and subsequently reduces risk-taking behavior. According to heterogeneity test results, the concerned effect becomes more significant for systemically important banks having higher capital adequacy ratios. Moreover, the most important banks with strong interbank dependence exhibit more pronounced changes in risk profiles responding to stricter capital supervision requirements. Our findings shed light on the economic consequences of monitoring strengthening from the perspective of regulatory authorities.
{"title":"Macro-prudential policy, digital transformations and banks’ risk-taking","authors":"Yongkui Li , Qixuan Du , Xiangrui Chao , Xiang Gao","doi":"10.1016/j.qref.2024.101941","DOIUrl":"10.1016/j.qref.2024.101941","url":null,"abstract":"<div><div>This study examines the influence of macro-prudential policies on risk-taking among systemically important banks using unbalanced panel data from 126 commercial banks in China between 2010 and 2021. Under a difference-in-differences setup, the empirics demonstrate that macro prudence in China effectively enhances large banks’ risk prevention measures and risk-mitigation efforts. Specifically, macro-prudential policy implementation facilitates the digital transformation of banking and subsequently reduces risk-taking behavior. According to heterogeneity test results, the concerned effect becomes more significant for systemically important banks having higher capital adequacy ratios. Moreover, the most important banks with strong interbank dependence exhibit more pronounced changes in risk profiles responding to stricter capital supervision requirements. Our findings shed light on the economic consequences of monitoring strengthening from the perspective of regulatory authorities.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"98 ","pages":"Article 101941"},"PeriodicalIF":2.9,"publicationDate":"2024-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142747688","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}
Pub Date : 2024-11-17DOI: 10.1016/j.qref.2024.101940
Takeshi Inoue
Most previous studies have quantitatively shown that progress in financial inclusion reduces income inequality. This study uses linear and squared terms of financial inclusion to analyze whether and how its effect on reducing income inequality changes over time. Financial inclusion is measured using a composite indicator that considers factors such as accessibility, availability, and actual use of financial services. The analysis utilizes panel data from 2004 to 2021 and samples comprising all countries or only developing countries. The empirical results for both samples indicate that the linear and squared terms of financial inclusion have negative and statistically significant effects on income inequality. Therefore, financial inclusion can reduce income inequality, and the marginal effect increases as financial inclusion progresses. The empirical results also indicate that such effects vary depending on the dimension of financial inclusion (i.e., access versus use) and type of financial services considered (i.e., bank accounts versus loans). For example, when financial inclusion is measured solely in terms of borrowing from formal financial institutions, the financial inclusion and income inequality relationship may be U-shaped. Therefore, different aspects of financial inclusion may affect income inequality differently over time.
以往的大多数研究都从数量上表明，普惠金融的进步会减少收入不平等。本研究使用金融包容性的线性和平方项来分析金融包容性对减少收入不平等的影响是否以及如何随着时间的推移而变化。金融包容性采用综合指标来衡量，该指标考虑了金融服务的可获得性、可用性和实际使用情况等因素。分析采用了 2004 年至 2021 年的面板数据，样本包括所有国家或仅包括发展中国家。两个样本的实证结果表明，金融包容性的线性项和平方项对收入不平等具有负向影响，且在统计上具有显著性。因此，普惠金融可以减少收入不平等，而且边际效应会随着普惠金融的发展而增加。实证结果还表明，这种影响因普惠金融的维度（即获取还是使用）和金融服务的类型（即银行账户还是贷款）而异。例如，如果仅从正规金融机构借款的角度来衡量普惠金融，普惠金融与收入不平等之间的关系可能呈 U 型。因此，随着时间的推移，金融包容性的不同方面可能会对收入不平等产生不同的影响。
{"title":"Financial inclusion and income distribution revisited: New findings","authors":"Takeshi Inoue","doi":"10.1016/j.qref.2024.101940","DOIUrl":"10.1016/j.qref.2024.101940","url":null,"abstract":"<div><div>Most previous studies have quantitatively shown that progress in financial inclusion reduces income inequality. This study uses linear and squared terms of financial inclusion to analyze whether and how its effect on reducing income inequality changes over time. Financial inclusion is measured using a composite indicator that considers factors such as accessibility, availability, and actual use of financial services. The analysis utilizes panel data from 2004 to 2021 and samples comprising all countries or only developing countries. The empirical results for both samples indicate that the linear and squared terms of financial inclusion have negative and statistically significant effects on income inequality. Therefore, financial inclusion can reduce income inequality, and the marginal effect increases as financial inclusion progresses. The empirical results also indicate that such effects vary depending on the dimension of financial inclusion (i.e., access versus use) and type of financial services considered (i.e., bank accounts versus loans). For example, when financial inclusion is measured solely in terms of borrowing from formal financial institutions, the financial inclusion and income inequality relationship may be U-shaped. Therefore, different aspects of financial inclusion may affect income inequality differently over time.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"98 ","pages":"Article 101940"},"PeriodicalIF":2.9,"publicationDate":"2024-11-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142701915","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-11-15DOI: 10.1016/j.qref.2024.101939
Hisayuki Yoshimoto , Andriy Zapechelnyuk
We study the empirical relationship between restaurants’ hygiene standards and their food quality scores, as evaluated by professional reviewers. By using data from the UK high-end restaurants, we show that this relationship is negative, observed across several econometric specifications and food quality measurements. We report that 3% of Michelin-starred restaurants have poor hygiene, while the same is true for 2.5% of high-end guidebook-listed restaurants in our dataset. We highlight two possibilities for this observed negative association: a strategic hypothesis (capturing restaurants’ choices trading off hygiene for quality), and a selection hypothesis (reflecting restaurants’ differential survival rates under competition). Our results indicate that the latter has more support. Our findings also illuminate potential channels through which the anticorrelation between hygiene and food quality could be mitigated and can be informative for hygiene inspectors in order to prioritize restaurants in their inspection schedule based on observable characteristics.
{"title":"Are there “Ratatouille” restaurants? On anticorrelation of food quality and hygiene","authors":"Hisayuki Yoshimoto , Andriy Zapechelnyuk","doi":"10.1016/j.qref.2024.101939","DOIUrl":"10.1016/j.qref.2024.101939","url":null,"abstract":"<div><div>We study the empirical relationship between restaurants’ hygiene standards and their food quality scores, as evaluated by professional reviewers. By using data from the UK high-end restaurants, we show that this relationship is negative, observed across several econometric specifications and food quality measurements. We report that 3% of Michelin-starred restaurants have poor hygiene, while the same is true for 2.5% of high-end guidebook-listed restaurants in our dataset. We highlight two possibilities for this observed negative association: a strategic hypothesis (capturing restaurants’ choices trading off hygiene for quality), and a selection hypothesis (reflecting restaurants’ differential survival rates under competition). Our results indicate that the latter has more support. Our findings also illuminate potential channels through which the anticorrelation between hygiene and food quality could be mitigated and can be informative for hygiene inspectors in order to prioritize restaurants in their inspection schedule based on observable characteristics.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"98 ","pages":"Article 101939"},"PeriodicalIF":2.9,"publicationDate":"2024-11-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142701914","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-11-07DOI: 10.1016/j.qref.2024.101937
Bin Zhou, Huai-Long Shi
Against the backdrop of increasing interest in factor investing, this paper explores volatility connectedness among theme factors and sector indices in the Chinese stock market using the Diebold-Yilmaz approach with quantile factor VAR. Our static analysis reveals significant similarities at extreme quantiles, contrasting with the conditional median. We find that higher connectedness measures at extreme quantiles correspond to improved performance of portfolios based on sectors and themes. Additionally, dynamic analysis indicates a strong link between total connectedness and major risk events in China. Moreover, variations in connectedness between the right and left tails serve as a market-level risk proxy, significantly influencing the performance of both themes and sectors. These findings underscore the importance of understanding volatility connectedness for devising effective investment strategies and enhancing risk management practices in the Chinese stock market.
{"title":"Quantile volatility connectedness among themes and sectors: Novel evidence from China","authors":"Bin Zhou, Huai-Long Shi","doi":"10.1016/j.qref.2024.101937","DOIUrl":"10.1016/j.qref.2024.101937","url":null,"abstract":"<div><div>Against the backdrop of increasing interest in factor investing, this paper explores volatility connectedness among theme factors and sector indices in the Chinese stock market using the Diebold-Yilmaz approach with quantile factor VAR. Our static analysis reveals significant similarities at extreme quantiles, contrasting with the conditional median. We find that higher connectedness measures at extreme quantiles correspond to improved performance of portfolios based on sectors and themes. Additionally, dynamic analysis indicates a strong link between total connectedness and major risk events in China. Moreover, variations in connectedness between the right and left tails serve as a market-level risk proxy, significantly influencing the performance of both themes and sectors. These findings underscore the importance of understanding volatility connectedness for devising effective investment strategies and enhancing risk management practices in the Chinese stock market.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"98 ","pages":"Article 101937"},"PeriodicalIF":2.9,"publicationDate":"2024-11-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142651684","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}
Pub Date : 2024-11-01DOI: 10.1016/j.qref.2024.101938
Junyong Lee , Kyounghun Lee , Frederick Dongchuhl Oh
This study examines the effect of credit rating concerns on corporate environmental, social, and governance (ESG) behavior. We use the plus or minus test on a large sample of ESG scores and S&P credit ratings of U.S. publicly traded firms from 2003 to 2017. We find that firms with credit rating concerns often increase their ESG activities. This finding holds even after we control for various factors affecting ESG practices. Moreover, firms on the boundary between investment- and speculative-grade ratings significantly improve their ESG performance compared to other cases. Finally, we find evidence that the positive effect of credit rating concerns on ESG activities is pronounced during the global financial crisis and then strengthens further. Overall, our study highlights the impact of credit ratings on corporate ESG behavior. (JEL G24, G32, M14)
{"title":"Credit ratings and corporate ESG behavior","authors":"Junyong Lee , Kyounghun Lee , Frederick Dongchuhl Oh","doi":"10.1016/j.qref.2024.101938","DOIUrl":"10.1016/j.qref.2024.101938","url":null,"abstract":"<div><div>This study examines the effect of credit rating concerns on corporate environmental, social, and governance (ESG) behavior. We use the plus or minus test on a large sample of ESG scores and S&P credit ratings of U.S. publicly traded firms from 2003 to 2017. We find that firms with credit rating concerns often increase their ESG activities. This finding holds even after we control for various factors affecting ESG practices. Moreover, firms on the boundary between investment- and speculative-grade ratings significantly improve their ESG performance compared to other cases. Finally, we find evidence that the positive effect of credit rating concerns on ESG activities is pronounced during the global financial crisis and then strengthens further. Overall, our study highlights the impact of credit ratings on corporate ESG behavior. (JEL G24, G32, M14)</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"98 ","pages":"Article 101938"},"PeriodicalIF":2.9,"publicationDate":"2024-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142586770","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}
Pub Date : 2024-11-01DOI: 10.1016/j.qref.2024.101935
Ezekiel Kofi Opoku , Edward Marfo-Yiadom , Mariya Gubareva , José Zorro Mendes
This pioneering study unravels the financial performance dynamics of Ghanaian insurance firms, leveraging proprietary data from the National Insurance Company (NIC), Ghana. Utilizing a system GMM technique on a comprehensive panel dataset of 40 firms from 2012 to 2017, it uncovers cost efficiency, claims ratio, retention ratio, audit fees, firm age and size, and board composition as crucial performance drivers. In what concerns the implications for the emerging economies, we show that the inclusion of the variable “risk retention and claims” helps insurance companies to better ascertain the right level of risks associated with the businesses they underwrite, so that the claims ratio will be minimized, and the appropriate premium ensured. Moreover, for the insurance sector in the frontier markets, with characteristics like Ghana´s economy, the study advocates for strategic cost control measures and emphasizes the need for proactive regulatory approaches aiming to enhance policy actions and to provide supplementary funds for firms demonstrating growth potential. These empirical evidence-based insights help design a roadmap for developing the insurance sector in the economies belonging to frontier and emerging markets.
{"title":"Unveiling dynamics: Financial performance determinants in the Ghanaian insurance industry","authors":"Ezekiel Kofi Opoku , Edward Marfo-Yiadom , Mariya Gubareva , José Zorro Mendes","doi":"10.1016/j.qref.2024.101935","DOIUrl":"10.1016/j.qref.2024.101935","url":null,"abstract":"<div><div>This pioneering study unravels the financial performance dynamics of Ghanaian insurance firms, leveraging proprietary data from the National Insurance Company (NIC), Ghana. Utilizing a system GMM technique on a comprehensive panel dataset of 40 firms from 2012 to 2017, it uncovers cost efficiency, claims ratio, retention ratio, audit fees, firm age and size, and board composition as crucial performance drivers. In what concerns the implications for the emerging economies, we show that the inclusion of the variable “risk retention and claims” helps insurance companies to better ascertain the right level of risks associated with the businesses they underwrite, so that the claims ratio will be minimized, and the appropriate premium ensured. Moreover, for the insurance sector in the frontier markets, with characteristics like Ghana´s economy, the study advocates for strategic cost control measures and emphasizes the need for proactive regulatory approaches aiming to enhance policy actions and to provide supplementary funds for firms demonstrating growth potential. These empirical evidence-based insights help design a roadmap for developing the insurance sector in the economies belonging to frontier and emerging markets.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"98 ","pages":"Article 101935"},"PeriodicalIF":2.9,"publicationDate":"2024-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142651683","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2024-10-23DOI: 10.1016/j.qref.2024.101933
Chune Young Chung , Pham Thi Ngoc Dung , Chang Liu
We examine whether institutional investors can reduce the risk of stock price crashes caused by managers’ intentional withholding of bad news. Specifically, we focus on the effect of institutional blockholder monitoring on stock price crash risk. The empirical results show negative relationships between institutional blockholdings and various crash risk variables, which suggests that institutional blockholder monitoring of nontransparent managerial behaviors can decrease crash risk. Furthermore, we find that the influence of monitors is more pronounced in firms with high information asymmetry, thereby corroborating the institutional blockholder monitoring role. This study validates the monitoring role of dedicated institutional investors in agency-motivated managerial behaviors.
{"title":"Institutional blockholder monitoring and stock price crash risk","authors":"Chune Young Chung , Pham Thi Ngoc Dung , Chang Liu","doi":"10.1016/j.qref.2024.101933","DOIUrl":"10.1016/j.qref.2024.101933","url":null,"abstract":"<div><div>We examine whether institutional investors can reduce the risk of stock price crashes caused by managers’ intentional withholding of bad news. Specifically, we focus on the effect of institutional blockholder monitoring on stock price crash risk. The empirical results show negative relationships between institutional blockholdings and various crash risk variables, which suggests that institutional blockholder monitoring of nontransparent managerial behaviors can decrease crash risk. Furthermore, we find that the influence of monitors is more pronounced in firms with high information asymmetry, thereby corroborating the institutional blockholder monitoring role. This study validates the monitoring role of dedicated institutional investors in agency-motivated managerial behaviors.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"98 ","pages":"Article 101933"},"PeriodicalIF":2.9,"publicationDate":"2024-10-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142530117","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}
Pub Date : 2024-10-22DOI: 10.1016/j.qref.2024.101934
Ben Ma , Yong Qiu
Although companies typically claim to implement an employee stock ownership plan (ESOP) for the purpose of incentivizing employees to enhance corporate performance, many non-incentive motives may be hidden behind this move. Using data on China’s stock market from 2014 to 2022, this paper demonstrates that due to optimistic market reactions, employee stock ownership plans may be related to covering up corporate fraud. Companies that have already committed fraud but have yet to have this fraud detected have a higher propensity for declaring an ESOP. In further research, we found this effect is more pronounced for companies with underperforming stock prices.
{"title":"Employee stock ownership plan as a measure of covering up corporate fraud: Evidence from China","authors":"Ben Ma , Yong Qiu","doi":"10.1016/j.qref.2024.101934","DOIUrl":"10.1016/j.qref.2024.101934","url":null,"abstract":"<div><div>Although companies typically claim to implement an employee stock ownership plan (ESOP) for the purpose of incentivizing employees to enhance corporate performance, many non-incentive motives may be hidden behind this move. Using data on China’s stock market from 2014 to 2022, this paper demonstrates that due to optimistic market reactions, employee stock ownership plans may be related to covering up corporate fraud. Companies that have already committed fraud but have yet to have this fraud detected have a higher propensity for declaring an ESOP. In further research, we found this effect is more pronounced for companies with underperforming stock prices.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"98 ","pages":"Article 101934"},"PeriodicalIF":2.9,"publicationDate":"2024-10-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142553621","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}
Pub Date : 2024-10-22DOI: 10.1016/j.qref.2024.101932
Faisal Faisal , Suresh Ramakrishnan , Sami Ur Rahman , Adnan Ali , Hamid Ghazi H Sulimany
Policymakers worldwide, especially central banks, are concerned about the causes and remedies of financial instability. This study examines the asymmetric influence of the shadow economy on financial instability. Moreover, the study analyzes the moderating role of institutional quality (IQ) in the shadow economy and financial instability nexus. This study used novel econometric techniques, including RALS-ADF and RALS-LM unit root tests, RALS-Fourier ARDL, NARDL, and single Fourier-Toda and Yamamoto causality tests, using yearly data from 1984 to 2020 for Turkey. Specifically, a positive shock to IQ declines financial instability, while a negative shock to IQ promotes it. Further, the negative shock to SE lessens the financial instability. Moreover, the negative shock to the interaction term implies that the shadow economy outweighs the IQ (depending on the level of IQ) in its effect in the case of Turkey, i.e., even if IQ increases (which usually decreases financial instability), the increasing SE has a dominant effect, and eventually upsurges financial instability. Additionally, in line with the institutional failure hypothesis, the negative shock to interaction term leads to a substantial increase in financial instability. Finally, the findings showed a one-way causality that runs from economic growth to financial instability and bidirectional causality between SE and GDP. The government should reduce shadow economic activities in the economy by enhancing IQ, which can increase government revenue and reduce financial instability.
{"title":"Asymmetric nexus between shadow economy and financial instability: Does institutional quality matter?","authors":"Faisal Faisal , Suresh Ramakrishnan , Sami Ur Rahman , Adnan Ali , Hamid Ghazi H Sulimany","doi":"10.1016/j.qref.2024.101932","DOIUrl":"10.1016/j.qref.2024.101932","url":null,"abstract":"<div><div>Policymakers worldwide, especially central banks, are concerned about the causes and remedies of financial instability. This study examines the asymmetric influence of the shadow economy on financial instability. Moreover, the study analyzes the moderating role of institutional quality (IQ) in the shadow economy and financial instability nexus. This study used novel econometric techniques, including RALS-ADF and RALS-LM unit root tests, RALS-Fourier ARDL, NARDL, and single Fourier-Toda and Yamamoto causality tests, using yearly data from 1984 to 2020 for Turkey. Specifically, a positive shock to IQ declines financial instability, while a negative shock to IQ promotes it. Further, the negative shock to SE lessens the financial instability. Moreover, the negative shock to the interaction term implies that the shadow economy outweighs the IQ (depending on the level of IQ) in its effect in the case of Turkey, i.e., even if IQ increases (which usually decreases financial instability), the increasing SE has a dominant effect, and eventually upsurges financial instability. Additionally, in line with the institutional failure hypothesis, the negative shock to interaction term leads to a substantial increase in financial instability. Finally, the findings showed a one-way causality that runs from economic growth to financial instability and bidirectional causality between SE and GDP. The government should reduce shadow economic activities in the economy by enhancing IQ, which can increase government revenue and reduce financial instability.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"98 ","pages":"Article 101932"},"PeriodicalIF":2.9,"publicationDate":"2024-10-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142651682","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}
Pub Date : 2024-10-18DOI: 10.1016/j.qref.2024.101930
Xin-Jiang He , Puneet Pasricha , Tuantuan Lu , Sha Lin
Investigating default risk in pricing options holds significant practical importance, as nearly all market participants and institutions face credit risk. Additionally, economic cycles and asset liquidity are crucial factors that should be incorporated. This paper considers these factors and derives an analytical pricing formula. Specifically, we model the economic cycles through switching volatility driven by a continuous-time Markov chain, while we adopt a discounting factor based on market liquidity levels to model the asset liquidity. We establish a risk-neutral measure after embracing a regime-switching Esscher transform, and formulate a price representation to value vulnerable options analytically despite the complexity of the developed model. We conduct several numerical experiments to validate the model’s efficacy and flexibility.
{"title":"Vulnerable options with regime switching and stochastic liquidity","authors":"Xin-Jiang He , Puneet Pasricha , Tuantuan Lu , Sha Lin","doi":"10.1016/j.qref.2024.101930","DOIUrl":"10.1016/j.qref.2024.101930","url":null,"abstract":"<div><div>Investigating default risk in pricing options holds significant practical importance, as nearly all market participants and institutions face credit risk. Additionally, economic cycles and asset liquidity are crucial factors that should be incorporated. This paper considers these factors and derives an analytical pricing formula. Specifically, we model the economic cycles through switching volatility driven by a continuous-time Markov chain, while we adopt a discounting factor based on market liquidity levels to model the asset liquidity. We establish a risk-neutral measure after embracing a regime-switching Esscher transform, and formulate a price representation to value vulnerable options analytically despite the complexity of the developed model. We conduct several numerical experiments to validate the model’s efficacy and flexibility.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"98 ","pages":"Article 101930"},"PeriodicalIF":2.9,"publicationDate":"2024-10-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142530116","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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