Advances in Pacific Basin Business, Economics and Finance: Volume 7

I build an equilibrium model trying to reconcile investor preferences with several features of the cat bond market. The driving force behind the model is a habit process, in that catastrophes are rare economic shocks that could bring investors closer to their subsistence level. The calibration requires shocks with an impact between −1% and −3% to explain a reasonable level of cat bond spreads. Such investor preferences are not only able to generate realistic cat bond returns and price comovement among different perils, but may also able to explain why cat bonds offer higher rewards compared to equally rated corporate bonds.

Current US tax laws provide investors an incentive to time the sales of their bonds to minimize tax liability. This gives rise to a tax-timing option that affects bond value. In reality, corporate bond investors’ tax-timing strategy is complicated by risk of default. Existing term structure models have ignored the effect of the tax-timing option, and how much corporate bond value is due to the tax-timing option is unknown. In this chapter, we assess the effects of taxes and stochastic interest rates on the timing option value and equilibrium price of corporate bonds by considering discount and premium amortization, multiple trading dates, transaction costs, and changes in the level and volatility of interest rates. We find that the value of the tax-timing option accounts for a substantial proportion of corporate bond price even when interest rate volatility is low. Ignoring the timing option value results in overestimation of credit spread, and underestimation of default probability and the marginal investor’s income tax rate. These estimation biases generally increase with bond maturity and credit risk.

This chapter tests the market risk and economic policy uncertainty (EPU) of five Asian stock market returns and finds positive and significant intertemporal relations between excess stock returns and conditional volatility/downside risk. The results support positive risk-return relations across five Asian markets after controlling for the lagged dividend yield and the change in EPU ( Δ EPU). The evidence strongly indicates that excess stock returns are negatively correlated with the Δ EPUs. This finding holds true not only for the domestic market but also for external sources. The negative effect of Δ EPU is more profound from the US and global markets as compared with those from the Europe, Japanese, and domestic markets and suggests that a pathway to forming an optimal strategy for portfolio risk management depends on developing an effective hedging strategy against the impact of Δ EPUs from US/global markets.

This chapter re-examines the Fama–French (FF) five-factor asset pricing model proposed by Fama and French (2015), since this model has a failure to capture the lower average returns on small stocks and its performance could not fully satisfy the original definitions of those considered factors. From the viewpoint of the econometrics analysis, we consider the inferior performance could be potentially caused by the spurious effect in the five-factor model, which could mislead the statistical inference and yield biased empirical results. We thus employ the CO-AR estimation by Wang and Hafner (2018) to prove the usefulness of the FF five-factor model. Empirical results demonstrate with the CO-AR estimation, the five-factor model indeed properly captures the lower average returns on small stocks and illustrate the sustainability of efficiency of the market, which is in contrast to the findings of Fama and French (2015). However, we propose a new perspective on the seminal five-factor model.

This is the first study to investigate the impact of corporate social responsibility (CSR) on corporate financial performance (CFP) in Mongolian banks. We hand-collect data to construct CSR disclosure index from 65 annual reports of 12 banks in Mongolia from 2003 to 2012. The results indicate that banks with larger size or Chief Executive Officer duality exhibit higher CSR performance. Moreover, banks with higher CSR performance tend to have higher net interest margin and lower non-performing loan. Furthermore, the CSR–CFP relationship varies before and after the financial crisis. The findings provide meaningful insight to the foreign investors regarding the effect of CSR on the profitability and credit risk in Mongolian banking sector.

We examine the informational roles of trades and time between trades in the domestic and overseas US Treasury markets. A vector autoregressive model is employed to assess the information content of trades and time duration between trades. We find significant impacts of trades and time duration between trades on price changes. Larger trade size induces greater price revision and return volatility, and higher trading intensity is associated with a greater price impact of trades, a faster price adjustment to new information and higher volatility. Higher informed trading and lower liquidity contribute to larger bid–ask spreads off the regular daytime trading period.

Poor performance of India’s commercial banks, in the public and private sectors as well as those owned by foreign interests, has been a major concern of the policymakers. Their gross non-performing assets (NPAs), as a proportion of gross advances, were 10.2% as of March 2017, which is reported to have grown to 11.6% in March 2018. The public sector banks (PSBs) have a share of 70% of business, and the ratio of NPAs to gross advances is 15.6%. The Reserve Bank of India’s forecast is that the ratio for PSBs would rise to 17.3% by March 2019, of private banks to 5.3%, and of foreign banks to 4.8%. This chapter focuses on causal factors which comprise macroeconomic as well as bank-specific factors, influencing NPA. We undertake a panel approach by using 16 annual observations (from fiscal year 2000–2001 to 2015–2016) for three groups of banks by ownership: public, private, and foreign. The study findings reveal that the macroeconomic and bank-specific factors are important determinants.

We examine the driving factors behind the decisions of parent companies to delist their listed subsidiaries in Japan. We undertake a logistic regression analysis and find that higher leverage, lower capital expenditure to total assets, and lower return on assets are significantly related to the probability of delisting. The market-to-book ratio is not statistically significant in the logistic regression. We find no evidence that the parent company takes advantage of market mispricing. The parent company may intend to place the extra debt of highly levered subsidiaries on its own balance sheet to obtain a better term in its debt contract.

This chapter makes two modest contributions by shedding light on the shock propagating role of endogenous firm entry in a more transparent way through the lens of frictionless, flexible-price real business cycle (RBC) model. We find that entry moderates rather than amplifies the shock, as production no longer occurs in a frictionless way but through business formation that consumes time and resources. We also resurrect the ability of the standard RBC model in resolving “productivity-hours worked puzzle” should credit barrier facing entry be formalized in the model.

This chapter differentiates the effect of solicited credit ratings (SCRs) and unsolicited credit ratings (UCRs) on bank leverage decision before and after the credit rating change. We find that banks with UCRs issue less debt relative to equity when the credit rating changes are approaching. Such findings are also prominent when bank credit rating moves from investment grade to speculative grade. After credit rating upgrades (downgrades), banks with unsolicited (solicited) credit ratings are inclined to issue more (less) debt relative to equity than those with solicited (unsolicited) credit ratings. We conclude that SCR and UCR changes lead to significantly different effects on bank leverage decision.

In this chapter, I analyze the behavior of banks in Chile, Colombia, and Mexico between 2005 and 2014. With data from the regulatory institutions of these countries, I show the influence of their institutions on the performance of banks. The World Bank provides two main datasets that measure the institutional characteristics of each country. Their doing business data set computes the ease of doing business while the governance data set measures the effectiveness of government and the perception that people have of their own governments. The results show that voice and accountability, which is a variable that measures the ability of citizens to select their government and participate in society, has a strong effect in the performance of loans. However, these institutional variables seem to have little effect on the volatility of profits.