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Article
Publication date: 29 December 2023

Keunbae Ahn, Gerhard Hambusch, Kihoon Hong and Marco Navone

Throughout the 21st century, US households have experienced unprecedented levels of leverage. This dynamic has been exacerbated by income shortfalls during the COVID-19 crisis…

Abstract

Purpose

Throughout the 21st century, US households have experienced unprecedented levels of leverage. This dynamic has been exacerbated by income shortfalls during the COVID-19 crisis. Leveraging and deleveraging decisions affect household consumption. This study investigates the effect of the dynamics of household leverage and consumption on the stock market.

Design/methodology/approach

The authors explore the relation between household leverage and consumption in the context of the consumption capital asset pricing model (CCAPM). The authors test the model's implication that leverage has a negative risk premium by transforming the asset pricing restriction into an unconditional linear factor model and estimate the model using the general method of moments procedure. The authors run time-series regressions to estimate individual stocks' exposures to leverage, and cross-sectional regressions to investigate the leverage risk premium.

Findings

The authors show that shocks to household debt have strong and lasting effects on consumption growth. The authors extend the CCAPM to accommodate this effect and find, using various test assets, a negative risk premium associated with household deleveraging. Looking at individual stocks the authors show that the deleveraging risk premium is not explained by well-known risk factors.

Originality/value

This paper contributes to the literature on the role of leverage in economics and finance by establishing a relation between household leverage and spending decisions. The authors provide novel evidence that households' leveraging and deleveraging decisions can be a fundamental and influential force in determining asset prices. Further, this paper argues that household leverage might explain the small, persistent, and predictable component in consumption growth hypothesised in the long-run risk asset pricing literature.

Details

International Journal of Managerial Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1743-9132

Keywords

Book part
Publication date: 24 April 2023

Saraswata Chaudhuri, Eric Renault and Oscar Wahlstrom

The authors discuss the econometric underpinnings of Barro (2006)'s defense of the rare disaster model as a way to bring back an asset pricing model “into the right ballpark for…

Abstract

The authors discuss the econometric underpinnings of Barro (2006)'s defense of the rare disaster model as a way to bring back an asset pricing model “into the right ballpark for explaining the equity-premium and related asset-market puzzles.” Arbitrarily low-probability economic disasters can restore the validity of model-implied moment conditions only if the amplitude of disasters may be arbitrary large in due proportion. The authors prove an impossibility theorem that in case of potentially unbounded disasters, there is no such thing as a population empirical likelihood (EL)-based model-implied probability distribution. That is, one cannot identify some belief distortions for which the EL-based implied probabilities in sample, as computed by Julliard and Ghosh (2012), could be a consistent estimator. This may lead to consider alternative statistical discrepancy measures to avoid the problem with EL. Indeed, the authors prove that, under sufficient integrability conditions, power divergence Cressie-Read measures with positive power coefficients properly define a unique population model-implied probability measure. However, when this computation is useful because the reference asset pricing model is misspecified, each power divergence will deliver different model-implied beliefs distortion. One way to provide economic underpinnings to the choice of a particular belief distortion is to see it as the endogenous result of investor's choice when optimizing a recursive multiple-priors utility a la Chen and Epstein (2002). Jeong et al. (2015)'s econometric study confirms that this way of accommodating ambiguity aversion may help to address the Equity Premium puzzle.

Details

Essays in Honor of Joon Y. Park: Econometric Methodology in Empirical Applications
Type: Book
ISBN: 978-1-83753-212-4

Keywords

Article
Publication date: 5 October 2023

Mudaser Ahad Bhat, Farhana Wani, Aadil Amin, G.M. Bhat and Farhat Bano Beg

This paper aims to investigate the effects of the COVID-19 crisis on trade flows in Asia Pacific countries and explores the causality between COVID-19-related shocks and trade.

Abstract

Purpose

This paper aims to investigate the effects of the COVID-19 crisis on trade flows in Asia Pacific countries and explores the causality between COVID-19-related shocks and trade.

Design/methodology/approach

The authors used two novel techniques, namely, two-stage instrumental-variables (2SIV) approach and Juodis, Karavias and Sarafids (JKS) causality test, to examine trade dynamics in the Asia Pacific region during the pandemic.

Findings

Using the monthly trade data of 17 Asia Pacific countries between January 2020 and December 2021, the results were threefold. Firstly, the empirical analysis showed that during the COVID-19 crisis, the flow of exports tended to persist idiosyncratically in comparison to the flow of imports. In particular, a specific finding was that the persistence level in exports was about 20%–25% higher than that in imports. Secondly, the authors found that the past values of COVID-19 cases and COVID-19 deaths contain information that helps to predict exports/imports over and above the information contained in the past values of exports/imports alone. Finally, the study established that the government response and stringency indexes have a Granger-causal relationship with exports and imports.

Research limitations/implications

For the foreseeable future, these findings have significant policy ramifications. Firstly, if a COVID-19 crisis-like situation emerges in the future, it will be critical for countries to maintain their competitiveness throughout the crisis, like the COVID-19 pandemic, while also rebuilding trade relationships wherever possible. Secondly, because information about government responses and measures can also be used to predict future trade flows, prudent management of government responses and stringent measures will be necessary in a crisis like COVID-19 to achieve the optimum level of exports and imports. At the same time, the trading partners should give up the idea of trade protection and focus on finding a way to balance the conflicting needs of imports and exports.

Originality/value

To the best of the authors’ knowledge, the authors, for the first time, used a 2SIV approach and JKS causality test to examine trade dynamics in the Asia Pacific region during the pandemic. In addition, the authors present the first comprehensive analysis of the evolving relationships between export and import flows and governmental policy responses under COVID-19. As a result, it contributes uniquely to both public and international economics.

Details

Journal of Chinese Economic and Foreign Trade Studies, vol. 16 no. 3
Type: Research Article
ISSN: 1754-4408

Keywords

Article
Publication date: 3 April 2023

Kofi Kamasa, Solomon Luther Afful and Isaac Bentum-Ennin

This paper seeks to examine the effect of monetary policy rate (MPR) on the lending rates of commercial banks in Ghana.

Abstract

Purpose

This paper seeks to examine the effect of monetary policy rate (MPR) on the lending rates of commercial banks in Ghana.

Design/methodology/approach

The paper employed the autoregressive distributed lag (ARDL) model as well as the non-linear autoregressive distributed lag (NARDL) model econometric techniques on a quarterly time series data from 2002 to 2018.

Findings

The ARDL results revealed that, MPR has a positive and significant effect on lending rate in the long and short run. Although there exists a direct relationship between MPR and lending rate, from the NARDL revealed an asymmetric effect of MPR on lending rate to the effect that, lending rate in Ghana responds more to positive shock (a rise in MPR) compared to a negative shock (a decrease in MPR) both in the long and short run.

Originality/value

The paper contributes to policy and literature in Ghana by providing empirical evidence on the asymmetric effect that MPR has on lending rates in Ghana. The paper recommends among others, the establishment of a rating system of banks according to their monetary policy compliance, where highly rated banks could have for instance a reduction on borrowed reserves from the central bank.

Details

Journal of Economic and Administrative Sciences, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1026-4116

Keywords

Book part
Publication date: 24 April 2023

Martín Almuzara, Gabriele Fiorentini and Enrique Sentana

The authors analyze a model for N different measurements of a persistent latent time series when measurement errors are mean-reverting, which implies a common trend among…

Abstract

The authors analyze a model for N different measurements of a persistent latent time series when measurement errors are mean-reverting, which implies a common trend among measurements. The authors study the consequences of overdifferencing, finding potentially large biases in maximum likelihood estimators (MLE) of the dynamics parameters and reductions in the precision of smoothed estimates of the latent variable, especially for multiperiod objects such as quinquennial growth rates. The authors also develop an R2 measure of common trend observability that determines the severity of misspecification. Finally, the authors apply their framework to US quarterly data on GDE and GDI, obtaining an improved aggregate output measure.

Details

Essays in Honor of Joon Y. Park: Econometric Methodology in Empirical Applications
Type: Book
ISBN: 978-1-83753-212-4

Keywords

Open Access
Article
Publication date: 18 October 2022

MD. Rasel Mia

This study aims to examine the impact of market competition, and capital regulation on the cost of financial intermediation of banks of the Bangladesh banking industry.

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Abstract

Purpose

This study aims to examine the impact of market competition, and capital regulation on the cost of financial intermediation of banks of the Bangladesh banking industry.

Design/methodology/approach

This study has used a balanced panel dataset comprised of 340 firm-year observations for 34 commercial banks in the Bangladesh banking industry from 2011 to 2020. The Prais Winsten panel estimator has been used to assess the impact of market competition and capital regulation on the cost of financial intermediation of banks.

Findings

Based on the regression results, this study has documented that greater market competition results in a lower cost of financial intermediation for banks. Similarly, an increase in the regulatory capital of banks increases the cost of financial intermediation of banks. The main findings of this study are found robust by using alternative proxies for the cost of financial intermediation, market competition and capital regulation. The regression results also suggest that private commercial banks tend to have a higher cost of financial intermediation than state-owned commercial banks.

Research limitations/implications

The regulatory reforms should aim to foster sustainable and optimal market competition for the Bangladesh banking industry to regulate the market power of banks to reduce the cost of financial intermediation. The regulatory authority of Bangladesh should find the optimal policy measures for implementing the capital regulation in the banking industry which would reduce the cost of financial intermediation margin of banks.

Originality/value

Unlike previous studies which have used structural market competition measures, this study has used non-structural market competition measures to assess the relationship between market competition and cost of financial intermediation in the Bangladesh banking industry.

Details

Asian Journal of Economics and Banking, vol. 7 no. 2
Type: Research Article
ISSN: 2615-9821

Keywords

Article
Publication date: 20 June 2022

Bhavya Srivastava, Shveta Singh and Sonali Jain

Amidst the backdrop of a wide array of structural developments that have revolutionized the competitive landscape of Indian commercial banking, this paper aims to empirically…

Abstract

Purpose

Amidst the backdrop of a wide array of structural developments that have revolutionized the competitive landscape of Indian commercial banking, this paper aims to empirically examine the role of two external monitoring mechanisms – competition and concentration on financial stability and further highlights the significance of bank-level heterogeneity in the nexus.

Design/methodology/approach

The study uses the Lerner index, defined through a translog specification, as a measure of market power. A system generalized method of moments technique accounts for the dynamic associations among the competition-concentration-stability nexus. The study further examines the moderating effect of ownership, size and capitalization on the nexus. The study also uses the Boone indicator and comments on the competition-bank stability relationship after controlling for bank governance.

Findings

The findings indicate that banks are less stable in a more competitive and higher concentrated environment. Exploring bank-level heterogeneity, first, the authors report that as competition increases, state-owned banks have greater incentives to undertake risky activities than private and foreign banks, which point to implicit sovereign guarantees that characterize the former. Second, the authors document an adverse influence of competition on the soundness of larger banks consistent with the “too-big-to-fail” assertion. Third, results corroborate the disciplinary role of regulatory capital and lend support to stricter capital norms under Basel III in a more competitive environment.

Originality/value

This paper is perhaps the first to capture competition and concentration in a single model; to reconcile conflicting evidence on competition-risk nexus; to shed light on the joint effect of competition and Basel accords for Indian banks.

Details

Competitiveness Review: An International Business Journal , vol. 33 no. 5
Type: Research Article
ISSN: 1059-5422

Keywords

Article
Publication date: 28 March 2023

Ernest Ezeani, Rami Ibrahim A. Salem, Muhammad Usman, Frank Kwabi and Bilal

Prior studies suggest that corporate cash holding will reflect firms' corporate governance (CG) environment. Consistent with this prediction, this study aims to examine the impact…

Abstract

Purpose

Prior studies suggest that corporate cash holding will reflect firms' corporate governance (CG) environment. Consistent with this prediction, this study aims to examine the impact of board characteristics on firms' cash holding in the UK, France and Germany.

Design/methodology/approach

Using 2,805 firm-year observations between 2009 and 2019, the authors examine the relationship between board characteristics and corporate cash holding. The authors used two measures of cash holdings as our dependent variables. As independent variables, the authors used CG characteristics relevant to effective board monitoring such as board meetings, outside directors, board size and board gender diversity.

Findings

The authors find that board characteristics influence firms' cash holdings of firms in the UK, France and Germany. However, this study documents evidence of varying impacts of board monitoring on the cash holding of the UK when compared to German and French firms, the countries that are classifiable as bank-based economies. The result of this study is robust to alternative cash-holding measures and endogeneity.

Practical implications

This study provides evidence supporting the board's impact in mitigating agency conflict in shareholder- and stakeholder-oriented CG environments.

Originality/value

This study contributes to previous works on firms’ financial orientation by showing that the impact of board characteristics on corporate cash holdings varies between bank- and market-based economies.

Details

International Journal of Accounting & Information Management, vol. 31 no. 3
Type: Research Article
ISSN: 1834-7649

Keywords

Article
Publication date: 20 April 2023

Mudaser Ahad Bhat and Mirza Nazrana Beg

This paper documents a robust empirical regularity: higher trade openness is associated with a lower unemployment rate. This paper also examines whether or not the effects of…

Abstract

Purpose

This paper documents a robust empirical regularity: higher trade openness is associated with a lower unemployment rate. This paper also examines whether or not the effects of trade liberalisation depend on countries' income levels. Further, the dynamic causation between trade openness and unemployment is also examined.

Design/methodology/approach

In order to obtain insight into the openness–unemployment nexus, following empirical methods were utilised - static panel models, dynamic panel models and a novel panel Granger causality approach proposed by Juodis et al. (2021).

Findings

Results suggest that openness negatively affects unemployment; the extent to which trade liberalisation affects unemployment depends on the income level of each country. The Juodis, Karavias, and Sarafidis (JKS) test confirmed that the past values of trade openness, inflation, foreign direct investment and gross domestic product per capita contain information that helps to predict unemployment in a more robust manner. To simply put, opening upto trade may eventually become a requirement for creating more job opportunities, but this alone may not be enough. The extent to which nations benefit from trade liberalisation is largely dependent on the overall economic conditions and their capability to move up the income scale.

Originality/value

A major difference between this study and those performed previously is that this study does not only examine the impact of trade openness on unemployment, but also investigates whether the unemployment effect of liberalisation is affected by countries' income levels – an issue that has received little attention in the past. Additionally, the unique panel non-causality approach put forth by Juodis et al. (2021) is used in the first instance to look into the causal link between trade openness and unemployment. This method has advantages in that the method enables capturing Granger-causality in homogeneous or heterogeneous panels amongst multiple variables.

Details

Journal of Economic Studies, vol. 50 no. 8
Type: Research Article
ISSN: 0144-3585

Keywords

Article
Publication date: 14 June 2023

Wenjing Han, Zhengfeng Zhang and Xiaoling Zhang

Farmland transfer choice is strongly associated with the livelihood strategies of rural households. The 2014 Three Property Rights Separation (TPRS) reform has legalized farmland…

Abstract

Purpose

Farmland transfer choice is strongly associated with the livelihood strategies of rural households. The 2014 Three Property Rights Separation (TPRS) reform has legalized farmland transfer practices in rural China, hence stimulating the farmland transfer market at the national scale. This paper aims to determine the extent to which rural family livelihood strategies are influenced by their participation decision in farmland transfer practices. Further, the authors examined the effectiveness of the TPRS reform on the impact of farmland transfer participation on rural household livelihood strategy choices.

Design/methodology/approach

Based on the sustainable livelihood approach (SLA) using data from a national rural household survey, the authors employ the logit model and the propensity score matching (PSM) method to estimate the impact of household farmland transfer participation. Its interaction effects with household livelihood capital on their livelihood strategy choices and diversification level are also investigated. The difference-in-difference (DID) model is employed to assess the effectiveness of the TPRS reform.

Findings

The results indicate that the participation in transferred-out farmland could improve rural households' non-agricultural livelihood strategies. While the participation in transferred-in farmland could improve the probability of rural families' engaging in pure-agricultural (PA) or agricultural-dependent (AD) livelihood strategies, the TPRS reform can attract specialized farmers to increase their farm size through the market solutions and encourage small farmers to leave their farmland to engage in more off-farm work.

Originality/value

This study contributes to the literature on farmers' livelihood by exploring the role of farmland transfer decision and the effectiveness of 2014 TPRS reform through the SLA approach.

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