Pub Date : 2025-12-01Epub Date: 2025-10-19DOI: 10.1016/j.qref.2025.102063
Helder Ferreira de Mendonça , Daniel Pereira dos Anjos , Ricardo Ramalhete Moreira
This paper proposes a novel measure to gauge market expectations of fiscal commitment and shows that such expectations significantly affect the market’s short- and medium-term expectations for the public debt-to-GDP ratio. We develop a Fiscal Commitment Index for Brazil, which extracts the government’s long-term adherence to fiscal sustainability from a fiscal reaction function using the Kalman filter. Empirically, we demonstrate that an increase in fiscal commitment leads to a reduction in debt expectations, particularly in a high public debt environment. The analysis further reveals that strengthened commitment reduces the volatility and the dispersion between optimism and pessimism in market expectations. Finally, we identify an asymmetric effect: deteriorations in fiscal commitment worsen expectations more severely than improvements do, especially under high debt. The findings underscore that credible long-term fiscal commitment is a critical determinant of market sentiment regarding public debt.
{"title":"The impact of government behavior on debt market expectations","authors":"Helder Ferreira de Mendonça , Daniel Pereira dos Anjos , Ricardo Ramalhete Moreira","doi":"10.1016/j.qref.2025.102063","DOIUrl":"10.1016/j.qref.2025.102063","url":null,"abstract":"<div><div>This paper proposes a novel measure to gauge market expectations of fiscal commitment and shows that such expectations significantly affect the market’s short- and medium-term expectations for the public debt-to-GDP ratio. We develop a Fiscal Commitment Index for Brazil, which extracts the government’s long-term adherence to fiscal sustainability from a fiscal reaction function using the Kalman filter. Empirically, we demonstrate that an increase in fiscal commitment leads to a reduction in debt expectations, particularly in a high public debt environment. The analysis further reveals that strengthened commitment reduces the volatility and the dispersion between optimism and pessimism in market expectations. Finally, we identify an asymmetric effect: deteriorations in fiscal commitment worsen expectations more severely than improvements do, especially under high debt. The findings underscore that credible long-term fiscal commitment is a critical determinant of market sentiment regarding public debt.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"104 ","pages":"Article 102063"},"PeriodicalIF":3.1,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145363385","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}
Despite the growing attention given to the impact of ESG performance on corporate finance, such as debt financing costs, little is known about the underlying mechanism. Hence, we aim to answer this question from the supply chain perspective. We use 19,121 enterprise-year observations of 3585 Chinese A-share listed enterprises over the 2013–2022 period and employ panel data regression models with fixed effects estimation. The empirical results confirm a negative relationship between ESG performance and corporate debt financing costs even after a series of robustness tests. We conclude that good ESG performance effectively reduces debt financing costs with a marginal effect of 0.002. This reduction effect can be achieved through two channels: supplier stability and customer concentration. Heterogeneity analyses further demonstrate that the reduction effect is more pronounced in non-state-owned enterprises and enterprises with low industrial competition. Overall, our findings enrich the understanding of how ESG performance reduces debt financing costs and highlight the importance of supply chain management for enterprises.
{"title":"The impact of ESG performance on debt financing costs from the perspective of supply chain","authors":"Qifa Xu , Changyu Ruan , Cuixia Jiang , Qinna Zhao","doi":"10.1016/j.qref.2025.102064","DOIUrl":"10.1016/j.qref.2025.102064","url":null,"abstract":"<div><div>Despite the growing attention given to the impact of ESG performance on corporate finance, such as debt financing costs, little is known about the underlying mechanism. Hence, we aim to answer this question from the supply chain perspective. We use 19,121 enterprise-year observations of 3585 Chinese A-share listed enterprises over the 2013–2022 period and employ panel data regression models with fixed effects estimation. The empirical results confirm a negative relationship between ESG performance and corporate debt financing costs even after a series of robustness tests. We conclude that good ESG performance effectively reduces debt financing costs with a marginal effect of 0.002. This reduction effect can be achieved through two channels: supplier stability and customer concentration. Heterogeneity analyses further demonstrate that the reduction effect is more pronounced in non-state-owned enterprises and enterprises with low industrial competition. Overall, our findings enrich the understanding of how ESG performance reduces debt financing costs and highlight the importance of supply chain management for enterprises.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"104 ","pages":"Article 102064"},"PeriodicalIF":3.1,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145363384","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 : 2025-12-01Epub Date: 2025-09-24DOI: 10.1016/j.qref.2025.102057
Rudra P. Pradhan , S.M.R.K. Samarakoon , B.A.C.H. Wijesinghe , Rana P. Maradana
This study investigates the association between the readability and tonal quality of annual reports, and corporate dividend payout policies in the Indian context, using a comprehensive dataset from 2012 to 2022. Applying detailed analysis and sophisticated statistical models, including Tobit and METobit regression techniques, to 10,085 firm-year observations, we ensured the robustness and reliability of the findings. The results reveal a significant association between the readability of corporate annual reports and corporate payouts. Specifically, firms whose annual reports are characterized by low readability tend to pay out smaller dividends. Moreover, if the narrative tone in annual reports leans towards negativity, litigiousness, uncertainty, or weak modal case, there is a significant negative association with the size and frequency of dividend payouts. The results underscore that the presence or absence of clear, comprehensible financial reporting with a positive tone is aligned with firms’ corporate payout policies. The findings add to the expanding body of research on the textual characteristics of financial disclosure and their corresponding economic consequences, confirming the necessity for transparent and readable financial reporting. The findings of this study hold implications for investors, corporate managers, and policymakers, who need to understand the strategic importance of clarity and tone in financial communications.
{"title":"Clear or confusing? How financial report readability and tone are associated with dividend payouts in Indian corporations","authors":"Rudra P. Pradhan , S.M.R.K. Samarakoon , B.A.C.H. Wijesinghe , Rana P. Maradana","doi":"10.1016/j.qref.2025.102057","DOIUrl":"10.1016/j.qref.2025.102057","url":null,"abstract":"<div><div>This study investigates the association between the readability and tonal quality of annual reports, and corporate dividend payout policies in the Indian context, using a comprehensive dataset from 2012 to 2022. Applying detailed analysis and sophisticated statistical models, including Tobit and METobit regression techniques, to 10,085 firm-year observations, we ensured the robustness and reliability of the findings. The results reveal a significant association between the readability of corporate annual reports and corporate payouts. Specifically, firms whose annual reports are characterized by low readability tend to pay out smaller dividends. Moreover, if the narrative tone in annual reports leans towards negativity, litigiousness, uncertainty, or weak modal case, there is a significant negative association with the size and frequency of dividend payouts. The results underscore that the presence or absence of clear, comprehensible financial reporting with a positive tone is aligned with firms’ corporate payout policies. The findings add to the expanding body of research on the textual characteristics of financial disclosure and their corresponding economic consequences, confirming the necessity for transparent and readable financial reporting. The findings of this study hold implications for investors, corporate managers, and policymakers, who need to understand the strategic importance of clarity and tone in financial communications.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"104 ","pages":"Article 102057"},"PeriodicalIF":3.1,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145159118","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 : 2025-12-01Epub Date: 2025-09-17DOI: 10.1016/j.qref.2025.102041
Ekaterina Pirozhkova , Nicola Viegi
This paper studies the bank lending channel of monetary policy in South Africa. We measure credit supply with homeloan data from banks and nonbanks and we use monetary shocks via high-frequency asset price reactions to policy announcements in a proxy-SVAR model. We find that the bank lending channel is operative, as banks reduce the supply of homeloans after monetary tightening, negatively impacting the housing market. In addition, we show that the deposit channel underpins the bank lending channel’s effectiveness. After a monetary tightening, banks widen the deposits spread and the volume of deposits shrinks, as expected. Since retail deposits are vital stable funding for banks, this mechanism drives the lending channel.
{"title":"The bank lending channel of monetary policy transmission in South Africa","authors":"Ekaterina Pirozhkova , Nicola Viegi","doi":"10.1016/j.qref.2025.102041","DOIUrl":"10.1016/j.qref.2025.102041","url":null,"abstract":"<div><div>This paper studies the bank lending channel of monetary policy in South Africa. We measure credit supply with homeloan data from banks and nonbanks and we use monetary shocks via high-frequency asset price reactions to policy announcements in a proxy-SVAR model. We find that the bank lending channel is operative, as banks reduce the supply of homeloans after monetary tightening, negatively impacting the housing market. In addition, we show that the deposit channel underpins the bank lending channel’s effectiveness. After a monetary tightening, banks widen the deposits spread and the volume of deposits shrinks, as expected. Since retail deposits are vital stable funding for banks, this mechanism drives the lending channel.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"104 ","pages":"Article 102041"},"PeriodicalIF":3.1,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145267526","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 : 2025-12-01Epub Date: 2025-11-24DOI: 10.1016/j.qref.2025.102065
Xinyu Liu , Liufang Xu
Innovation has becoming increasingly important in face of China’s decelerating productivity growth nowadays. At the same time, cross-shareholding has gradually emerged as a significant equity structure that could influence firms’ innovative behavior. This study examines the impact of cross-shareholding on innovation using data from Chinese listed firms spanning from 2003 to 2022. Employing difference-in-differences and propensity score matching approach, we find that cross-shareholding positively influences innovation in terms of patent applications and grants. The observed effects are primarily attributed to knowledge spillovers from high-knowledge to low-knowledge side and reduced financial constraints, while we find no evidence supporting the corporate governance and R&D input mechanisms. Furthermore, the benefits of cross-shareholding are not equally distributed between the involved parties. The effects are more pronounced for larger, high-tech, and state-owned enterprises, highlighting the importance of resources and strategic focus in driving innovation. This study offers critical insights for policymakers grappling with the multifaceted impacts of cross-shareholding.
{"title":"Cross-shareholding and innovation: Do both sides benefit equally?","authors":"Xinyu Liu , Liufang Xu","doi":"10.1016/j.qref.2025.102065","DOIUrl":"10.1016/j.qref.2025.102065","url":null,"abstract":"<div><div>Innovation has becoming increasingly important in face of China’s decelerating productivity growth nowadays. At the same time, cross-shareholding has gradually emerged as a significant equity structure that could influence firms’ innovative behavior. This study examines the impact of cross-shareholding on innovation using data from Chinese listed firms spanning from 2003 to 2022. Employing difference-in-differences and propensity score matching approach, we find that cross-shareholding positively influences innovation in terms of patent applications and grants. The observed effects are primarily attributed to knowledge spillovers from high-knowledge to low-knowledge side and reduced financial constraints, while we find no evidence supporting the corporate governance and R&D input mechanisms. Furthermore, the benefits of cross-shareholding are not equally distributed between the involved parties. The effects are more pronounced for larger, high-tech, and state-owned enterprises, highlighting the importance of resources and strategic focus in driving innovation. This study offers critical insights for policymakers grappling with the multifaceted impacts of cross-shareholding.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"104 ","pages":"Article 102065"},"PeriodicalIF":3.1,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145623628","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 role of monetary policy in combating money laundering is underexplored. This study examines how central bank monetary instruments, financial development, and governance influence anti-money laundering (AML) effectiveness across 126 countries (2012–2022). Using macroeconomic theories, we analyze financial institutions’ trade-offs between AML compliance and profit-driven behaviors, such as exploiting high deposit rates. Key findings indicate: (1) broad money supply weakens AML effectiveness, especially post-2015 due to FinTech growth; (2) deposit rates, amplified by financial development, increase money laundering risks; (3) strong control of corruption enhances AML, particularly in less developed financial systems. These results, derived from OLS with robust standard errors and two-step system GMM, highlight the need to integrate AML objectives into monetary and financial policies through targeted measures, including interest rate monitoring, AI-driven transaction tracking, FATF cooperation, and governance reforms.
{"title":"Monetary policy, financial development and money laundering: International evidence","authors":"Nguyen-Quynh-Nhu Ngo , Ngoc-Yen-Nhi Vuong , M. Kabir Hassan , Mabruk Billah","doi":"10.1016/j.qref.2025.102051","DOIUrl":"10.1016/j.qref.2025.102051","url":null,"abstract":"<div><div>The role of monetary policy in combating money laundering is underexplored. This study examines how central bank monetary instruments, financial development, and governance influence anti-money laundering (AML) effectiveness across 126 countries (2012–2022). Using macroeconomic theories, we analyze financial institutions’ trade-offs between AML compliance and profit-driven behaviors, such as exploiting high deposit rates. Key findings indicate: (1) broad money supply weakens AML effectiveness, especially post-2015 due to FinTech growth; (2) deposit rates, amplified by financial development, increase money laundering risks; (3) strong control of corruption enhances AML, particularly in less developed financial systems. These results, derived from OLS with robust standard errors and two-step system GMM, highlight the need to integrate AML objectives into monetary and financial policies through targeted measures, including interest rate monitoring, AI-driven transaction tracking, FATF cooperation, and governance reforms.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"104 ","pages":"Article 102051"},"PeriodicalIF":3.1,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145159119","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 : 2025-12-01Epub Date: 2025-09-23DOI: 10.1016/j.qref.2025.102053
I-Ju Chen , Hang Thi Dieu Nguyen
This study examines the impact of firm diversification on performance during the Covid-19 pandemic, with a focus on investment efficiency and labor productivity. Leveraging the pandemic as an external shock, we explore whether diversified firms navigate disruptions more effectively than single-segment firms. Our findings indicate that diversified firms, particularly those with greater financial flexibility, outperform the focused counterparts. This study highlights the role of internal capital and labor markets in crisis mitigation and underscores the importance of financial resilience. It contributes to the diversification debate and provides managerial insights into strengthening organizational resilience amid external shocks.
{"title":"Corporate diversification, financial flexibility and firm performance during the Covid-19 pandemic","authors":"I-Ju Chen , Hang Thi Dieu Nguyen","doi":"10.1016/j.qref.2025.102053","DOIUrl":"10.1016/j.qref.2025.102053","url":null,"abstract":"<div><div>This study examines the impact of firm diversification on performance during the Covid-19 pandemic, with a focus on investment efficiency and labor productivity. Leveraging the pandemic as an external shock, we explore whether diversified firms navigate disruptions more effectively than single-segment firms. Our findings indicate that diversified firms, particularly those with greater financial flexibility, outperform the focused counterparts. This study highlights the role of internal capital and labor markets in crisis mitigation and underscores the importance of financial resilience. It contributes to the diversification debate and provides managerial insights into strengthening organizational resilience amid external shocks.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"104 ","pages":"Article 102053"},"PeriodicalIF":3.1,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145267524","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 : 2025-12-01Epub Date: 2025-11-08DOI: 10.1016/j.qref.2025.102073
Igor Martins , Hedibert Freitas Lopes
This paper expands on stochastic volatility models by proposing a data-driven method to select the macroeconomic events most likely to impact volatility. The paper identifies and quantifies the effects of macroeconomic events across multiple countries on exchange rate volatility using high-frequency currency returns, while accounting for persistent stochastic volatility effects and seasonal components capturing time-of-day patterns. Given the hundreds of macroeconomic announcements and their lags, we rely on sparsity-based methods to select relevant events for the model. We contribute to the exchange rate literature in four ways: First, we identify the macroeconomic events that drive currency volatility, estimate their effects and connect them to macroeconomic fundamentals. Second, we find a link between intraday seasonality, trading volume, and the opening hours of major markets across the globe. We provide a simple labor-based explanation for this observed pattern. Third, we show that including macroeconomic events and seasonal components is crucial for forecasting exchange rate volatility. Fourth, our proposed model yields the lowest volatility and highest Sharpe ratio in portfolio allocations when compared to standard SV and GARCH models.
{"title":"What events matter for exchange rate volatility?","authors":"Igor Martins , Hedibert Freitas Lopes","doi":"10.1016/j.qref.2025.102073","DOIUrl":"10.1016/j.qref.2025.102073","url":null,"abstract":"<div><div>This paper expands on stochastic volatility models by proposing a data-driven method to select the macroeconomic events most likely to impact volatility. The paper identifies and quantifies the effects of macroeconomic events across multiple countries on exchange rate volatility using high-frequency currency returns, while accounting for persistent stochastic volatility effects and seasonal components capturing time-of-day patterns. Given the hundreds of macroeconomic announcements and their lags, we rely on sparsity-based methods to select relevant events for the model. We contribute to the exchange rate literature in four ways: First, we identify the macroeconomic events that drive currency volatility, estimate their effects and connect them to macroeconomic fundamentals. Second, we find a link between intraday seasonality, trading volume, and the opening hours of major markets across the globe. We provide a simple labor-based explanation for this observed pattern. Third, we show that including macroeconomic events and seasonal components is crucial for forecasting exchange rate volatility. Fourth, our proposed model yields the lowest volatility and highest Sharpe ratio in portfolio allocations when compared to standard SV and GARCH models.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"104 ","pages":"Article 102073"},"PeriodicalIF":3.1,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145525842","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 : 2025-12-01Epub Date: 2025-10-24DOI: 10.1016/j.qref.2025.102062
Messaoud Chibane , Ano Kuhanathan
Recent literature has identified a strong link between EURO zone inflation and the price of natural gas prices, establishing itself after the Russian-Ukraine war. We revisit this relationship by analyzing the probability of extreme movements in market-based inflation expectations and its relation to energy prices. We find that, after 2022, short-term and long-term expected inflation upward tail risk tend to increase jointly, pointing to a potential de-anchoring effect. This effect is not as pronounced for the downward tail risk. This phenomenon seems to be specific to the EURO zone and related to natural gas prices rather than to energy prices in general. Our results suggest that beyond monetary policy, solving natural gas supply issues and limiting price volatility should be key targets for the EURO zone policy makers in order to rein in inflation expectations.
{"title":"Examining the impact of natural gas price volatility on Euro zone inflation expectations","authors":"Messaoud Chibane , Ano Kuhanathan","doi":"10.1016/j.qref.2025.102062","DOIUrl":"10.1016/j.qref.2025.102062","url":null,"abstract":"<div><div>Recent literature has identified a strong link between EURO zone inflation and the price of natural gas prices, establishing itself after the Russian-Ukraine war. We revisit this relationship by analyzing the probability of extreme movements in market-based inflation expectations and its relation to energy prices. We find that, after 2022, short-term and long-term expected inflation upward tail risk tend to increase jointly, pointing to a potential de-anchoring effect. This effect is not as pronounced for the downward tail risk. This phenomenon seems to be specific to the EURO zone and related to natural gas prices rather than to energy prices in general. Our results suggest that beyond monetary policy, solving natural gas supply issues and limiting price volatility should be key targets for the EURO zone policy makers in order to rein in inflation expectations.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"104 ","pages":"Article 102062"},"PeriodicalIF":3.1,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145465850","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 introduce an optimization model to assist Asset and Liability Management (ALM) departments in mitigating interest rate risk (IRR) within fixed-income portfolios. The model incorporates real-world constraints, including the cost of administering interest rate derivatives and liquidity constraints, aiming to formulate effective hedge strategies across diverse scenarios. In particular, liquidity constraints gain significance, as market limitations can hinder the execution of derivatives hedging strategies, a concern particularly relevant in emerging markets with lower trading volumes. We provide a comprehensive backtesting of the model under various portfolio times-to-maturity, nominal values, and shapes, revealing key insights. The analysis underscores the critical role of Dollar duration and Dollar convexity constraints in determining hedge strategy effectiveness. Liquidity constraints also emerge as a pivotal factor influencing the allocation of future contracts and strategy feasibility. Our main contribution is offering practitioners a valuable decision-making framework that incorporates real-world constraints, adding a nuanced understanding of interest rate risk management.
{"title":"Optimization model for banking Asset Liability Management","authors":"Henrique Rosset Ferreira , Marcelo Monteiro Teixeira , Tiago Pascoal Filomena , Guilherme Kirch , Daniel Francisco Vancin , Eduardo Horta","doi":"10.1016/j.qref.2025.102074","DOIUrl":"10.1016/j.qref.2025.102074","url":null,"abstract":"<div><div>We introduce an optimization model to assist Asset and Liability Management (ALM) departments in mitigating interest rate risk (IRR) within fixed-income portfolios. The model incorporates real-world constraints, including the cost of administering interest rate derivatives and liquidity constraints, aiming to formulate effective hedge strategies across diverse scenarios. In particular, liquidity constraints gain significance, as market limitations can hinder the execution of derivatives hedging strategies, a concern particularly relevant in emerging markets with lower trading volumes. We provide a comprehensive backtesting of the model under various portfolio times-to-maturity, nominal values, and shapes, revealing key insights. The analysis underscores the critical role of <em>Dollar duration</em> and <em>Dollar convexity</em> constraints in determining hedge strategy effectiveness. Liquidity constraints also emerge as a pivotal factor influencing the allocation of future contracts and strategy feasibility. Our main contribution is offering practitioners a valuable decision-making framework that incorporates real-world constraints, adding a nuanced understanding of interest rate risk management.</div></div>","PeriodicalId":47962,"journal":{"name":"Quarterly Review of Economics and Finance","volume":"104 ","pages":"Article 102074"},"PeriodicalIF":3.1,"publicationDate":"2025-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145578872","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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