Knowledge that Transforms

We extend the semi-nonparametric (SNP) density of We estimate robust tail-indexes for testing the existence of the unconditional higher-order moments. We obtain closed-form expressions of partial moments and expected shortfall under the time-varying SNP density with the GJR-GARCH for modeling returns. A comparative study between SNP and Hansen's skewed-t, based on skewness-kurtosis frontiers, in-sample and backtesting analyses, is also implemented. Finally, we conduct an out-of-sample portfolio selection exercise for the stocks of the S&P 100 index through an equity screening method based on our parametric one-sided reward/risk performance measures and compare with the Sharpe ratio portfolio.

Interest rate caps are the most common form of payday loan regulation, yet little academic research has examined their consequences. I investigate the impacts of tightening the cap from 15% to 10% in Rhode Island, using a difference-in-difference framework and a unique proprietary dataset of payday loans issued by major nationwide lenders between 2009 and 2013. Lenders always charge the prevailing cap, creating a sharp and clean variation in interest rate. I show that loan usage increases at the extensive and intensive margins, amounting to elasticity estimates in the range of 0.7–1.0. I also find that loan sequences become longer and more likely to end with default. No lenders exit the market, implying that market power existed. Furthermore, I find no evidence of credit rationing as a result of the lower cap. These changes imply an upper bound of $3.3 million per year for neoclassical consumer surplus. However, I show that behavioral consumers can be worse off by the policy if more than half of the increase in demand is due to overborrowing.

We examine the impact of government economic policy uncertainty (GEPU) on corporate innovation and identify a cost-of-capital transmission channel. We find that GEPU increases firms’ cost of capital, which translates into lower innovation. As economic policy uncertainty rises, firms with more exposure to such uncertainty face a higher weighted average cost of capital and innovate less. Innovations of financially constrained firms and firms relying on external finance in a competitive environment are affected more. Our study provides novel evidence that higher economic policy uncertainty hinders innovation not only through the traditional investment irreversibility channel, but also through the cost-of-capital channel.

The purpose of this study is to provide empirical evidence on the links between currency and banking crises. Panel data probit and bivariate probit models are estimated to a sample of 21 developed and developing countries having monthly observations between the years 1985 and 2010. The findings indicate that banking crises precede currency crises, and vice versa. Currency crises also indirectly influence future banking crises probability through external shocks, liberalized financial markets, or highly-leveraged banking sectors. The study also finds evidence of contemporaneous correlation between the two crises. The results not only confirm the theoretical links between banking and currency crises, but also underline the importance of higher frequency data in analyzing the relationship between various financial crises.

This paper examines whether stock market listing influences the persistence of bank performance across crises. We find that for both publicly and privately held banks, bank performance during the 1998 crisis is a strong predictor of bank performance during the 2007–2008 crisis. While for publicly held banks, the persistence is uniquely driven by bottom performers, for privately held banks the persistence is also driven by a group of top performers. We further show that banks that make a private-to-public transition between the two crises underperform in the 2007–08 crisis, especially if they are top performers during the 1998 crisis and more concerned about short-term stock price. We also document that after making a private-to-public transition, banks increase risk in a way that makes them more vulnerable to crises.

The potential impact of interconnected financial institutions on interbank financial systems is a financial stability concern for central banks and regulators. In examining how financial shocks propagate through contagion effects, we argue that endogenous individual bank choices are necessary to properly consider how losses develop as the interbank lending network evolves. We present an agent-based model to endogenously reconstruct interbank networks based on 6600 banks’ decision rules and behaviors reflected in quarterly balance sheets. We compare the results of our model to the results of a traditional stationary network framework for contagion. The model formulation reproduces dynamics similar to those of the 2007–09 financial crisis and shows how bank losses and failures arise from network contagion and lending market illiquidity. When calibrated to post-crisis data from 2011 to 2014, the model shows the U.S. banking system has reduced its likelihood of bank failures through network contagion and illiquidity, given a similar stress scenario.

Resolution of non-performing loans is a key determinant of bank credit default losses. This paper analyzes macroeconomic and systematic frailty effects of the default resolution time for a sample of 17,395 defaulted bank loans in USA, Great Britain, and Canada. We find that frailties have a huge impact on the resolution times. In a representative sample portfolio, median resolution times more than double in a recession when compared to an expansion. This leads to highly skewed distributions of losses and considerable systematic risk of the bank portfolio.

Disruptive innovations in digital payments are happening in a large number of countries around the world. In this paper, we investigate how merchants’ acceptance of a contactless card technology affects card sales. Using score matching and difference-in-difference techniques on a unique sample of about 275,580 merchants in France, we find that accepting contactless payments in 2018 increases the card-sales amount by 15.3 percent on average (and by 17.1 percent the card-sales count) compared to merchants who do not accept contactless payments. We also find evidence that accepting contactless payments exerts a positive spillover of about 1.3 percent in the amount of contact card sales, and thus significantly increases the average annual card-sales amount and count for small merchants and new entrepreneurs.

This paper uses the industry-level panel data from 1975–2005 and estimates Wurgler's η, the elasticity of industry investment to value-added, for each of Japan's 47 prefectures. We find that Wurgler's η varies considerably across prefectures even though there is no regulatory restriction on inter-regional flow of financial capital. Moreover, exploiting cross-prefecture variation in Wurgler's η, we show that the share of government loans is strongly and negatively correlated with the quality of capital allocation. We also find that this negative correlation is robust to controlling for local economic and financial development, and more pronounced in declining industries than growing industries. Moreover, the share of government loans is positively correlated with investment-to-output ratio but negatively correlated with total factor productivity growth. Taken as a whole, the results are broadly consistent with the view that Japan's government financial institutions stimulate investment in declining industries while distorting capital allocation and reducing overall productivity growth.

The paper provides a high-frequency analysis of liquidity dynamics in the eurozone sovereign bond market over tranquil and crisis periods. We study time series of liquidity across the yield curve using high-frequency data from MTS, one of Europe’s leading electronic fixed-income trading platforms. We document flight-to-liquidity effects as investors prefer to trade on shorter-term benchmarks during liquidity dry-ups. We provide evidence of significant commonalities in spread and depth liquidity proxies which are weaker during the crisis period for both core and periphery economies although periphery countries display higher commonality than core countries during the crisis. We show that illiquidity of the periphery countries plays an important role in market dynamics and Granger causes illiquidity, volatility, returns, and CDS spreads across the maturity spectrum in both calm and crisis periods. Liquidity is priced both as a characteristic and as a risk factor even when controlling for credit risk, pointing to liquidity’s systematic dimension and importance.