Global Liquidity, Risk Premiums and Growth Opportunities

This paper constructs new indicators of liquidity for equity, bond and money markets in major advanced and emerging market countries, documents their evolution and co-movements, and assesses the extent to which such measures are determinants of selected spreads and proxy measures of countries’ growth opportunities. Three main results obtain. First, there is evidence of an historical increase in market liquidity since the early 1990s, in part as a result of advances in international financial integration, but markets have been increasingly exposed to global systemic liquidity shocks. Second, liquidity indicators appear to be important determinants of bond spreads in advanced economies and EMBI spreads in emerging markets. Third, improvements in market liquidity have significant real effects, as liquidity indicators have a significant positive impact on proxy measures of countries’ growth opportunities.liquidity, risk premiums, growth opportunities

Financial integration and risk-adjusted growth opportunities: a global perspective

This paper documents the dynamics of financial integration for major advanced and emerging markets economies during the 1994-2009 period, assesses whether advances in integration have had a significant direct positive impact on countries' growth opportunities, and identifies some of the channels through which financial integration may indirectly foster growth. Three main results are obtained. First, financial integration has progressed significantly worldwide and has been fastest in emerging markets. Second, a country's speed of integration predicts its future risk-adjusted growth opportunities, while improved riskadjusted growth opportunities may predict future advances in integration, but not in all cases, suggesting a causal relationship from financial integration to improved real prospects. Third, advances in financial integration foster increased financial openness, financial development, and the liquidity of equity markets, but the reverse does not necessarily hold. Policies aimed at fostering financial integration may be necessary, albeit not sufficient, to allow countries to reap its benefits.International finance ; Financial risk management

Financial Integration, Globalization, and Real Activity

Using data for a large number of advanced and emerging market economies during 1982-2009, this paper examines the distinct impact of financial integration and globalization on several dimensions of real activity. We find that: (a) financial integration has progressed significantly worldwide, particularly in emerging markets, as well as within regions; (b) advances in financial integration predict better growth prospects; (c) both advances in financial integration and globalization are associated with higher growth, lower growth volatility, and lower probabilities of severe declines in real activity. Advances in financial integration and globalization indeed foster countries’ growth, and there appears to be no trade-off between these advances and macroeconomic stability.financial integration, globalization, real activity

Banking Crises and Crisis Dating: Theory and Evidence

We formulate a simple theoretical model of a banking industry that we use to identify and construct theory-based measures of systemic bank shocks (SBS). These measures differ from “banking crisis” (BC) indicators employed in many empirical studies, which are constructed using primarily information on government actions undertaken in response to bank distress. Using both country-level and firm-level samples, we show that SBS indicators consistently predict BC indicators, indicating that BC indicators actually measure lagged policy responses to systemic bank shocks. We then re-examine the impact of macroeconomic factors, bank market structure, deposit insurance, and external shocks on the probability of systemic bank shocks (SBS) and on “banking crisis” (BC) indicators. We find that the impact of these variables on the likelihood of a policy response to banking distress (as represented by BC indicators) is frequently quite different from that on the likelihood of a systemic bank shock (SBS). We argue that disentangling the effects of systemic bank shocks and policy responses is crucial in understanding the roots of banking crises. We believe that many findings of a large empirical literature need to be re-assessed.

Bank Competition, Asset Allocations and Risk of Failure: An Empirical Investigation

This study is an empirical investigation of theoretical predictions concerning the impact of bank competition on bank risk and asset allocations. Recent work (Boyd, De Nicolò and Jalal, 2009, BDNJ henceforth) predicts that as competition in banking increases, the loan-to-asset ratio will rise (under reasonable assumptions), but the probability of bank failure can either increase or decrease. However, the probability of bank failure will fall if and only if borrowers’ response to take on less risk as loan rates decline is sufficiently strong. We test these predictions using two samples with radically different attributes. With both, we find that banks’ probability of failure is negatively and significantly related to measures of competition. We also find that as competition intensifies, borrower risk decreases and the loan-to-asset ratio increases. These results are consistent with the predictions of the BDNJ model.

Systemic Risks and the Macroeconomy

This paper presents a modeling framework that delivers joint forecasts of indicators of systemic real risk and systemic financial risk, as well as stress-tests of these indicators as impulse responses to structural shocks identified by standard macroeconomic and banking theory. This framework is implemented using large sets of quarterly time series of indicators of financial and real activity for the G-7 economies for the 1980Q1-2009Q3 period. We obtain two main results. First, there is evidence of out-of sample forecasting power for tail risk realizations of real activity for several countries, suggesting the usefulness of the model as a risk monitoring tool. Second, in all countries aggregate demand shocks are the main drivers of the real cycle, and bank credit demand shocks are the main drivers of the bank lending cycle. These results challenge the common wisdom that constraints in the aggregate supply of credit have been a key driver of the sharp downturn in real activity experienced by the G-7 economies in 2008Q4-2009Q1.

Forecasting Tail Risks

This paper presents an early warning system as a set of multi-period forecasts of indicators of tail real and financial risks obtained using a large database of monthly US data for the period 1972:1-2014:12. Pseudo-real-time forecasts are generated from: (a) sets of autoregressive and factor-augmented vector autoregressions (VARs), and (b) sets of autoregressive and factor-augmented quantile projections. Our key finding is that forecasts obtained with AR and factor-augmented VAR forecasts significantly underestimate tail risks, while quantile projections deliver fairly accurate forecasts and reliable early warning signals for tail real and financial risks up to a 1-year horizon

Banking Crises and Crisis Dating: Theory and Evidence

Abstract We formulate a simple theoretical model of a banking industry which we use to identify and construct theory-based measures of systemic bank shocks (SBS). These measures differ from "banking crisis" (BC) indicators employed in many empirical studies, which are constructed using primarily information on government actions undertaken in response to bank distress. Using both country-level and firm-level samples, we show that SBS indicators consistently predict BC indicators based on four major BC series that have appeared in the literature, indicating that BC indicators actually measure lagged policy responses to systemic bank shocks. We then re-examine the impact of macroeconomic factors, bank market structure, deposit insurance, and external shocks on the probability of a systemic bank shocks (SBS) and on "banking crisis" (BC) indicators. We find that the impact of these variables on the likelihood of a policy response to banking distress is totally different from that on the likelihood of a systemic bank shock. Disentangling the effects of systemic bank shocks and policy responses turns out to be crucial in understanding both the roots of bank fragility and the relevant policy implications. Many findings of a large empirical literature need to be reassessed and/or re-interpreted

Sigh in patients with acute hypoxemic respiratory failure and acute respiratory distress syndrome: the PROTECTION pilot randomized clinical trial

Background: Sigh is a cyclic brief recruitment manoeuvre: previous physiological studies showed that its use could be an interesting addition to pressure support ventilation to improve lung elastance, decrease regional heterogeneity and increase release of surfactant. Research question: Is the clinical application of sigh during pressure support ventilation (PSV) feasible? Study design and methods: We conducted a multi-center non-inferiority randomized clinical trial on adult intubated patients with acute hypoxemic respiratory failure or acute respiratory distress syndrome undergoing PSV. Patients were randomized to the No Sigh group and treated by PSV alone, or to the Sigh group, treated by PSV plus sigh (increase of airway pressure to 30 cmH2Ofor 3 seconds once per minute) until day 28 or death or successful spontaneous breathing trial. The primary endpoint of the study was feasibility, assessed as non-inferiority (5% tolerance) in the proportion of patients failing assisted ventilation. Secondary outcomes included safety, physiological parameters in the first week from randomization, 28-day mortality and ventilator-free days. Results: Two-hundred fifty-eight patients (31% women; median age 65 [54-75] years) were enrolled. In the Sigh group, 23% of patients failed to remain on assisted ventilation vs. 30% in the No Sigh group (absolute difference -7%, 95%CI -18% to 4%; p=0.015 for non-inferiority). Adverse events occurred in 12% vs. 13% in Sigh vs. No Sigh (p=0.852). Oxygenation was improved while tidal volume, respiratory rate and corrected minute ventilation were lower over the first 7 days from randomization in Sigh vs. No Sigh. There was no significant difference in terms of mortality (16% vs. 21%, p=0.342) and ventilator-free days (22 [7-26] vs. 22 [3-25] days, p=0.300) for Sigh vs. No Sigh. Interpretation: Among hypoxemic intubated ICU patients, application of sigh was feasible and without increased risk