We analyze the financial integration of the new European Union (EU) member states' stock markets using the negative (positive) coexceedance variable that counts the number of large negative (large positive) returns on a given day across the countries. A similar analysis is performed for the old EU countries.
We use a multinomial logit model to investigate how persistence, asset classes, and volatility are related to the coexceedance variables. We find that the effects differ (a) between negative and positive coexceedance variables (b) between old and new EU member states, and (c) before and after the EU enlargement in 2004, suggesting a closer connection of new EU stock markets to those in Western Europe.
This paper examines whether investors receive compensation for holding crash-sensitive stocks. We capture the crash sensitivity of stocks by their lower tail dependence (LTD) with the market based on copulas. We find that stocks with weak LTD serve as a hedge during crises, but, overall, stocks with strong LTD have higher average future returns. This effect cannot be explained by traditional risk factors and is different from the impact of beta, downside beta, coskewness, and cokurtosis. Our findings are consistent with results from the empirical option pricing literature and support the notion that investors are crash-averse.
Taking advantage of a trades-and-quotes database, the main stylized facts and dynamic properties of a time series related to spot precious metals, that is, gold, silver, palladium, and platinum, are documented. The behavior of spot prices, returns, volume, and selected liquidity measures is analyzed. A clear evidence of periodic patterns matching the trading hours of the most active markets, London, Zurich, New York, as well as Asian markets, is found. The time series of spot returns have thus properties similar to those of traditional financial assets with fat tails, asymmetry, periodic behaviors in the conditional variances, and volatility clustering. The empirical analyzes show, as expected, that gold is the most liquid and less volatile asset, whereas palladium and platinum are traded less.
Taking advantage of a trades-and-quotes high-frequency database, we document the main stylized facts and dynamic properties of spot precious metals, i.e. gold, silver, palladium, and platinum. We analyze the behaviors of spot prices, returns, volume, and selected liquidity measures. We find clear evidence of periodic patterns matching the trading hours of the most active markets round-the-clock. The time series of spot returns have thus properties similar to those of traditional financial assets with fat tails, asymmetry, periodic behaviors in the conditional variances, and volatility clustering. The gold (platinum) is the most (least) liquid and less (most) volatile asset. Commonality in liquidities of precious metals is very strong.
Contrary to the common wisdom that asset prices are barely possible to forecast, we show that that high and low prices of equity shares are largely predictable. We propose to model them using a simple implementation of a fractional vector autoregressive model with error correction (FVECM). This model captures two fundamental patterns of high and low prices: their cointegrating relationship and the long memory of their difference (i.e. the range), which is a measure of realized volatility. Investment strategies based on FVECM predictions of high/low US equity prices as exit/entry signals deliver a superior performance even on a risk-adjusted basis.
Focusing on the art market, where auction houses act as brokers between art sellers and buyers, we investigate whether more experienced brokers achieve better performance as information providers. We use a unique data set of auctions of Italian paintings in various houses around the world, and we measure experience as the number of times an auctioneer has auctioned the artworks of a certain artist in a given location. We find that more experienced auction houses (i) are more likely to sell and (ii) provide more precise pre-sale estimates. These findings suggest that experience plays an important role for brokers to reduce illiquidity and opacity in markets with asymmetric information.
The allocation of authority affects the communication of information about clients within banks. We document that in small business lending internal control leads loan officers to propose inflated credit ratings for their clients. Inflated ratings are, however, anticipated and partly reversed by the credit officers responsible for approving credit assessments. More experienced loan officers inflate those parameters of a credit rating which are least likely to be corrected by credit officers. Our analysis covers 10,568 internal ratings for 3,661 small business clients at six retail banks. We provide empirical support to theories suggesting that internal control can induce strategic communication within organizations when senders and receivers of information have diverging interests. Our findings also point to the limits of the four-eyes principle as a risk-management tool in financial institutions.
We employ a unique dataset of credit assessments for 3,756 small businesses by nine banks using an identical rating model to examine (i) to what extent loan officers use their discretion to smooth credit ratings of their clients, and (ii) to assess whether this use of discretion is driven by information about the creditworthiness of the borrower or by the insurance of clients against fluctuations in lending conditions. Our results show that loan officers make extensive use of their discretion to smooth clients' credit ratings: One in five rating shocks induced by changes in the quantitative assessment of a client is reversed by the loan officer, independent of whether the borrower experiences a positive or a negative rating shock. We find that this smoothing of credit ratings is hardly driven by soft information: Loan officers are just as likely to smooth persistent and market-related shocks as they are to smooth temporary and firm-specific shocks. We do find that loan officers are more likely to smooth ratings at banks where interest rates are more risk-sensitive. However, this behavior is not purely driven by an implicit insurance contract between loan officers and their clients. Instead, the use of discretion by loan officers seems at least partly driven by their reluctance to communicate price changes: Within banks loan officers are not more likely to smooth rating changes which lead to the strongest interest rate changes.
We study retail deposit withdrawals from large European commercial banks which incurred substantial investment losses in the wake of the U.S. subprime crisis. We first show that the propensity of households to withdraw deposits increases with the magnitude of bank distress. This withdrawal risk is, however, substantially mitigated by client-level switching costs that arise from tight client relationship with a distressed bank or limited access to branches of non-distressed banks. Our findings provide empirical support to the Basel III liquidity regulations which emphasize the role of well-established client relationships for the stability of bank funding.
Policy makers and practitioners agree that the scaling up of microfinance requires financial sustainability in the industry and access to commercial capital markets. At the same time they worry that the commercialization of microfinance may lead to a mission drift: Microfinance institutions (MFIs) may abandon their focus on poor, rural, female borrowers and orientate themselves towards more profitable clients. In this contribution we review the empirical evidence on commercialization and mission drift in microfinance, and the evidence is that fears of a mission drift in the industry do not seem warranted. Furthermore, we report on a recent study in which we attempt to broaden the analysis of mission drift, by comparing the impact of commercial microfinance banks as opposed to ordinary retail banks on household access to and use of bank accounts. We find that commercial microfinance banks do expand the frontier of finance providing further justification to their support by bilateral and multilateral donors.
