A generalized method for detecting abnormal returns and changes in systematic risk

The authors generalize traditional event-study techniques to allow for event-induced parameter shifts, shifting variances, and firm-specific event periods. Their method, which nests traditional methods, also permits systematic risk to change gradually during the event period and exit the period at higher or lower levels. The authors use their approach to study 132 banks that acquired other institutions between 1989 and 1995. The authors find a significant change in the systematic risk of the acquiring firms, significant ARCH effects, and an event period that ends before the date of the announcement. None of these results is detectable using conventional methods. These results imply that (1) event studies that cannot account for information leakage may be biased, and (2) changes in systematic risk can occur in the absence of abnormal returns, and (3) regulators, investors and bank managers must evaluate each acquisition on its own merits; reliance on averages can mask important distinctions across acquisitions.Bank mergers ; Econometric models ; Risk

On the pervasive effects of Federal Reserve settlement regulations

To manage their reserve positions, depository institutions in the United States actively buy and sell deposits at the Federal Reserve Banks via the federal funds market. Beginning in 1991, the Eurodollar market also became an attractive venue for trading deposits at the Federal Reserve Banks. Prior to 1991, the Federal Reserve’s statutory reserve requirement on Eurocurrency liabilities of U.S. banking offices discouraged use of Eurocurrency liabilities as a vehicle for trading deposits at the Federal Reserve. This impediment was removed in December 1990. Beginning in January 1991, the overnight instruments in the federal funds market and in the Eurodollar markets, except for minor differences in risk, became similar vehicles for exchanging deposits at Federal Reserve Banks. Because the risk characteristics of the instruments differ, the law of one price need not hold precisely across the two markets. Yet, the authors hypothesize that, beginning in 1991, the two trading instruments became close enough substitutes that price pressures in one market began to show through to the other. Herein, the authors examine overnight LIBOR for U.S. bank settlement effects. During the period when the federal funds market and Eurodollar markets are similar venues for trading deposits at Federal Reserve Banks, they find strong settlement effects in overnight LIBOR. However, during the period when Eurocurrency liabilities carry a reserve tax, they find no evidence of a settlement effect in overnight LIBOR. Their results suggest that (i) the microstructure of the federal funds market spills over into the markets for substitute assets and (ii) Federal Reserve rules have implications beyond U.S. borders.Federal funds market (United States) ; Euro-dollar market ; Money market funds

An Intraday Examination of the Federal Funds Market: Implications for the Theories of the Reverse-J Pattern

The intraday literature suggests that returns, variances, and volume form an intraday reverse-J pattern. Two competing theories explain the observed patterns: private information about future security prices and trading stoppages. The Federal funds market allows a unique opportunity to study the causes of intraday patterns because private information common to most markets does not play a role in setting prices. We find reverse-J variance patterns while accounting for generalized autoregressive conditional heteroskedasticity (GARCH) model effects. Our results support trading stops as an explanation for the reverse-J pattern and suggest that private information is not a necessary condition for the observed pattern

An Event Study Analysis of Too-Big-to-Fail After the Dodd-Frank Act: Who is Too Big to Fail?

One feature of the Dodd-Frank Act is the elimination of too-big-to-fail (TBTF) banks. TBTF is a government guarantee of large banks that has been shown to increase the value of these banks, so removing the guarantee should result in a price decline of TBTF bank stock. Using event study methods, we find very limited reaction to the process of eliminating TBTF. Specifically, there is limited reaction among the largest banks and banks receiving special attention, such as Systemically Important Financial Institutions (SIFI) banks. Instead, smaller banks not receiving special attention show some evidence of negative returns with the elimination of TBTF

Pay without performance: the unfulfilled promise of executive compensation, by Bebchuk, L. and Fried, J. Harvard University Press: Cambridge and London, 2004, 304 pp. USD 24.95 (cloth)

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What do bank acquirers value in non-public bank mergers and acquisitions?

This study investigates what target, market, and acquirer characteristics influence book value multiples in 288 non-public bank acquisitions from 2001 Q3 to 2005 Q4. Multiples rise with acquirer size and capital ratios. Targets with high proportions of industry-adjusted core and large deposits have higher multiples. When using target variables relative to acquirers, multiples rise with higher proportions of core and large deposits, larger average bank size in the market, and relative growth in assets, loans, and deposits as well as market growth. In contrast to prior findings for public targets, acquirers do not pay premiums for target accounting performance.Bank mergers Bank acquirers Bank acquisitions and growth Acquisition

Analysis Of Federal Funds Rate Changes And Variance Patterns

We analyze Fed funds rate changes in GARCH-in-mean (GARCH-M) models and find that daily rate change and variance patterns differ with the timing of the rate observation, but that all patterns are generally consistent with optimal reserve account management. We also find that Fed funds daily and intraday variances exhibit trends and persistence, and that daily variance effects differ when using marginal rates versus daily weighted average rates. Furthermore, we find that conditional variances do not provide information about daily or intraday rate changes. Our results provide support for the use of GARCH models for studies on other financial assets. JEL classification: G21, G28. © The Southern Finance Association and the Southwestern Finance Association